UPDATE 3-Gazprom bows to European client price pressure

Tue Jul 3, 2012 11:59am EDT

Related Topics

* E.ON wins retroactive price cut

* E.ON sees 1 bln euro earnings boost

* Ends arbitration between E.ON and Gazprom

* Gazprom safeguards long-term deals (Adds analyst comment, updates shares)

By Christoph Steitz and Vera Eckert

FRANKFURT, July 3 (Reuters) - Russia's Gazprom has given in to customer pressure and offered German utility E.ON a price cut on its long-term gas supplies, boding well for other firms from Germany, Italy and Poland seeking to renegotiate.

Germany's biggest utility said on Tuesday it had reached a settlement with Gazprom on long-term gas supply contracts that would significantly raise its earnings outlook for 2012.

"E.ON expects the settlement to have a positive impact of about 1 billion euros ($1.26 billion) on the group's half-year results," E.ON said, adding that it would also end ongoing arbitration proceedings with Gazprom.

The settlement includes a retroactive adaptation of pricing conditions going back to last quarter of 2010, E.ON said.

"This agreement represents a compromise and takes into account the current trends and developments of the natural gas market," Gazprom Export CEO Alexander Medvedev said in a statement.

It's a compromise which offers hope for other European firms seeking to revise deals with Russia's gas export monopoly.

European gas firms such as Germany's E.ON Ruhrgas are being squeezed as they buy gas under long-term deals with Gazprom or Statoil linked to the price of oil while having to sell it to customers at lower retail prices linked to the freely traded spot market.

As a result, Gazprom has been in arbitration with major European customers such as E.ON and Poland's PGNiG.

Germany's second biggest utility RWE, which is also trying to get a better deal on its gas from Russia, declined to comment.

GAZPROM SAFEGUARDS LONG-TERM DEALS

While the deal means lower revenues for Gazprom in the short-term, the Russian company said it safeguarded its pricing model as it faces rising competition from liquefied natural gas (LNG) from overseas.

"The value of this deal is not only in the today's financial results, but more in the long-term stability reached (and) the long-term contracts remain the basis for supplying Europe with gas," Gazprom said.

About 40 percent of the European Union's gas imports are supplied by Russia, while 80 percent of Gazprom's revenues come from European customers.

Gazprom is aiming to sell 150 billion cubic metres (bcm) of gas to Europe this year, the same as in 2011, but analysts doubt this volume can be reached as sales and output have plummeted due to the euro zone's financial crisis and rivalry from other sources, such as LNG from Qatar.

In June, Gazprom's gas output fell almost 14 percent year on year, but Gazprom said that the increased competitiveness of its gas under the new agreement could bolster its sales volumes.

"Gazprom had to give up some price concession as Europe is in recession and as gas is being displaced out of the merit order of power generation in favour of coal," Societe Generale analyst Thierry Bros said.

E.ON RAISES EARNINGS OUTLOOK

As a result of the agreement, E.ON raised its earnings forecasts for 2012, saying that it now expected earnings before interest, tax, depreciation and amortisation (EBITDA) of 10.4-11.0 billion euros ($13.1-13.8 billion), compared with a previous target of 9.6-10.2 billion.

Underlying net income for the year is expected to reach 4.1-4.5 billion euros, up from a previous forecast of 2.3-2.7 billion.

"The deal with Gazprom is good news and helps to solve a big problem for the company," a Frankfurt-based trader said.

Citi analysts were more cautious in their view.

"(It) is a positive development with regards to timing. It is, however, less than ideal in our view," Citi analysts said, noting the narrowed oil/gas spread and the fact it is not a permanent resolution.

"If the oil-gas spread expands again materially ... then the business will revert to losses," they said.

Shares in the company gained on the news, rising as much as 3.7 percent but ended down 0.23 percent.

E.ON had renegotiated most of its long-term gas contracts, for instance with Norwegian supplier Statoil, before the deal with Gazprom.

"With the successful completion of the talks with Gazprom, E.ON has now successfully renegotiated the pricing conditions of all of its currently oil-indexed volumes under its long-term gas supply contracts," E.ON said.

"This marks a major milestone in restoring the competitiveness of E.ON's long-term gas contracts."

($1 = 0.7947 euros) (Writing by Henning Gloystein in London; additional reporting by Vladimir Soldatkin in Moscow, Daniela Pegna in Frankfurt, Oleg Vukmanovic in London; editing by Jason Neely)

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