Gazprom PJSC

Primary Credit Analyst: Elena Anankina, CFA, Moscow (7) 495-783-4130; [email protected]

Secondary Contact: Alexander Griaznov, Moscow (7) 495-783-4109; [email protected]

Table Of Contents

Credit Highlights

Outlook

Our Base-Case Scenario

Company Description

Peer Comparison

Business Risk

Financial Risk

Liquidity

Environmental, Social, And Governance

Government Influence

Issue Ratings - Subordination Risk Analysis

Ratings Score Snapshot

Related Criteria

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Business Risk: SATISFACTORY Issuer Credit Rating Vulnerable Excellent bbb Foreign Currency Rating bbb- bbb- BBB-/Stable/A-3

Financial Risk: SIGNIFICANT Local Currency Rating

Highly leveraged Minimal BBB/Negative/A-2 Anchor Modifiers Group/Gov't

Credit Highlights

Overview

Key strengths Key risks Solid competitive position, supported by vast Very challenging export gas markets: record low gas prices, structural global oversupply of reserves, large-scale production, vertical integration, liquefied natural gas, additional demand destruction via COVID-19, uncertainty about the and a high 36% market share in Europe. pace of market recovery and the long-term role of gas in the global and especially European energy balance. Relatively low production costs and revenue-linked Our expectation of weakening financial metrics, with FFO to debt dipping below our 30% taxes, which should support profitability despite threshold in 2020, with gradual recovery in 2021-2022. ongoing pressures on oil and gas prices. Our expectation of financial policy focused on Sizable (though somewhat flexible) capex needs and a financial policy focused on deleveraging through planned cuts in capital and increasing dividend payout to 50% of net income. operating expenditures, or potential asset sales. Our expectation of an extremely high likelihood of Risks of operating in Russia, including lack of predictability in domestic price and tax support from the Russian government, Gazprom's regulations, a relatively weak banking system, and geopolitical pressures. controlling shareholder.

Structural challenges on the oil and gas markets are likely to hit Gazprom's 2020 performance, with expected FFO to debt dipping below our 30% threshold. We expect gas markets to remain very difficult in 2020, reflecting structural oversupply due to massive liquefied natural gas (LNG) capacity additions versus only moderate demand growth and full storage in Europe, even before the pandemic, in 2019. Additional demand destruction from COVID-19 has pushed spot gas prices to record lows (with Title Transfer Facility [TTF] at below $2 per million Btu [mmBtu] in May 2020, compared with above $8 in late 2018 and $4 average in 2019). This has pressured Gazprom's 2020 export volumes, while low oil prices and the OPEC++ oil-production-cut agreement hit the EBITDA contribution from Gazprom's sizable oil business. Despite 20% cuts in capital expenditure (capex) and operating expenditure (opex) announced by Gazprom's management, we expect Gazprom's funds from operations (FFO) to debt to plunge to 20%-25% in 2020.

A 2021-2022 recovery in metrics will depend on the market revival and on the company's mitigation steps. Although the gas market is extremely volatile and the impact of COVID-19 on energy demand remains highly uncertain, we expect markets to gradually recover in 2021-2022, if low gas prices finally trigger shut-downs of high-cost LNG production, and if post-pandemic economic growth brings gas demand in Europe and Turkey closer to historical levels. We expect the market rebalancing to be only gradual, given full gas storage in Europe, intense competition, apparent low supply and demand sensitivity to prices, and the risk of long-lasting COVID-19 impact on gas demand

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 8, 2020 2 Gazprom PJSC fundamentals. We expect 2021-2022 FFO to debt to be in the 25%-35% range and we understand that Gazprom's management aims to eventually bring leverage in line with its financial policy targets, including non-negative free operating cash flow (FOCF) and net debt to EBITDA below 2x (corresponding to S&P Global Ratings-adjusted FFO to debt of 35%-40%), through capex and opex cuts, or potentially asset sales.

Completion of Nord Stream 2 will have little bearing on credit quality. While we believe that sanctions could result in delays and cost overruns, Nord Stream 2 was 94% constructed in December 2019 when the sanctions were imposed, meaning that most costs are sunk. We believe that Gazprom's 2020-2021 exports are constrained by demand rather than by pipeline availability, because ample transit capacity is already available thanks to the five-year transit agreement with Ukraine and Turkstream commissioning in January 2020. We note that broad sanctions on Russia's energy exports are not part of our base-case scenario for Gazprom, for Russia, or for the European energy sector in general.

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Outlook: Negative

The negative outlook on the 'BBB' local currency rating reflects our view of the reduced headroom in Gazprom's stand-alone credit metrics and continuing uncertainty in the global oil and gas markets. We would lower the local currency rating if our stand-alone credit profile (SACP) on Gazprom deteriorates from the current 'bbb-' to 'bb+'. We view FFO to debt sustainably above 30% as commensurate with a 'bbb-' SACP.We expect Gazprom will be below this threshold in 2020, but will restore its credit metrics in 2021-2022 on the back of market recovery and the company's deleveraging efforts.

The stable outlook on the 'BBB-' foreign currency rating mirrors that on Russia and reflects our view of the extremely high likelihood the state would support Gazprom and that such support would offset a potential deterioration in the SACP.

Downside scenario

If our SACP on Gazprom were to deteriorate by one notch to 'bb+', we would lower our local currency rating to 'BBB-' and affirm our foreign currency rating at 'BBB-'. This could happen due to weakening liquidity or if FFO to debt were to stay consistently below 30% due to persistently low gas prices and export volumes, larger-than-expected investments or dividends, or potential contingent liabilities on joint ventures and ship-or-pay contracts. A major shift in European gas markets might lead us to reassess Gazprom's business strength, and could therefore also weigh on the local currency rating.

We would lower both local and foreign currency ratings on Gazprom if we downgraded the sovereign.

Assuming the sovereign rating and the likelihood of extraordinary state support remain unchanged, the SACP would have to decline to 'b+' in order to pressure the foreign currency rating, a situation which is still very far from our base case.

Upside scenario

We could revise the outlook on the local currency rating to stable from negative only if market conditions strengthened significantly and Gazprom displayed comfortable headroom in its financial metrics, with FFO to debt sustainably above 30%.

We would raise the foreign and local currency ratings if we upgraded the sovereign, but this is not our base-case scenario.

Our Base-Case Scenario

Assumptions • 2020 gas exports volumes to decline to $166.6 billion cubic meters (bcm), and prices to $133/million cubic meters (mcm), compared with 192.6 bcm net of repo transactions and $211/mcm in 2019, in line with management

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guidance; 2021-2022 export volumes and realized prices to gradually recover to 185-195 bcm and $150-180/mcm, as European spot prices gradually recover to about $4 in 2021 and $4.5 in 2022.

• Crude oil production to decline by up to 15% in 2020 and a further 2% in 2021, reflecting Russia's oil production cut commitments under the OPEC++ agreement, followed by up to 20% growth in 2022 when the agreement expires.

• Domestic gas sales volumes to decline about 5% in 2020 and recover in 2021, in line with our forecast for Russian GDP of minus 4.8% in 2020 and 4.5% growth in 2021.

• Capex cuts for Russian ruble (RUB)216 billion for the gas business, about RUB100 billion for the oil business and additional opex cuts of RUB140 billion, in line with management's announcement.

• Dividends: 30%-40%-50% payout in line with Gazprom's dividend policy.

• No material asset sales or acquisitions, in the absence of immediate plans by management.

Key Metrics Gazprom PJSC--Key Metrics*

2019A 2020E 2021F 2022F Brent crude price (bil. US$) 64.2 33.0 50.0 55.0 Average US$/RUB exchange rate 64.7 74.0 71.0 71.5 EBITDA (tril. RUB) 2.1 About 1.3 1.6-1.8 2.1-2.3 Capext(tril. RUB) 1.8 About 1.3 About 1.3 About 1.5 FOCF (tril. RUB) 0.1 About -0.3 About 0 0.1-0.3 FFO/Debt 0.5 20-25% 25-35% 30-40% Debt/EBITDA 1.7 3.5-3.7 2.5-3 2-2.5

A--Actual. E--Estimate. F--Forecast. FFO--Funds from operations. Capex--Capital expenditure. FOCF--Free operating cash flow. RUB--Russian ruble.

We expect weak European prices and volumes to hit Gazprom's EBITDA in 2020, but gas price realizations to remain above spot prices. We expect Gazprom's realized gas prices to be above record low European spot levels, because a significant part of its gas exports is under oil-indexed, hybrid, gas forward prices, or via Gazprom's electronic sales platform with a premium above spot. In 2019, Gazprom's average realized prices were $211 per mcm versus about $140-$150/mcm ($4/mmBtu) spot, and in 2020, Gazprom's management expects $133 compared with spot prices below $80 in May 2020. On top of lower demand caused by a warm winter and the pandemic-related economic recession, Gazprom's export volumes will be hit by lower offtake under the company's oil-indexed contracts, Europe's full storage, and intense competition with LNG. Effectively, Gazprom will have to bear a large share of the market rebalancing burden through lower exports.

The pace of EBITDA recovery in 2021-2022 will depend on gradual market rebalancing and post-COVID-19 economic growth. Despite extreme volatility in the gas market, we expect Gazprom's prices and volumes will demonstrate visible recovery in 2021-2022 from extremely low 2020 levels. Still, we do not necessarily assume that Gazprom would be able to retain price realizations as much above spot levels as in 2019. Additional EBITDA contributions should come from oil price recovery (with our Brent price assumption of $50 already in 2021) and ramp-up of gas exports to China in line with Gazprom's contract with CNPC (to about 5 bcm in 2020, 10 bcm in 2021, and eventually 38 bcm in 2025), where potentially higher costs should be offset with favorable price realizations and tax holidays.

Gazprom plans to cut capex by 20% in 2020 and potentially in 2021, but longer term, new strategic projects may emerge. We understand that Gazprom's management plans to cut 2020 capex to RUB1.3 trillion from the RUB1.8 trillion peak in 2019, which reflects commissioning of several large projects in late 2019-early 2020 (first stage of

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Power of Siberia-1, Turkstream pipeline to Turkey), lower production needs in 2020-2022, and the company's policy and track record of adjusting capex in line with operating cash flow. Still, fundamentally, Gazprom has large maintenance capex and needs to continue heavy investments in ongoing related projects (notably the pre-contracted Amur gas-processing plant and the second stage of Power of Siberia). Longer term, if and when pressures on operating cash flows ease, Gazprom may invest in new projects such as the Power of Siberia-2 gas pipeline from Western Siberia to China, Kharasavey gas field, a gas chemical plant in Yamal, and Ust-Luga LNG and gas processing facility (the latter is to be constructed by Gazprom's 50:50 joint venture with Rusgasdobycha).

Dividends are set to increase in relative, not necessarily absolute, terms. We understand that Gazprom will stick to its new dividend policy approved in December 2019, which focuses on gradually increasing the dividend payout to 30%, 40%, and 50% of 2019, 2020, and 2021 net income, respectively. Management clarified that while the payout ratio goes up, the actual dividend amount could go down if net income declines, and that the board can decide to skip dividends if reported net debt to EBITDA is above 2.5x. Our base case therefore assumes that dividends will not increase in absolute terms in 2019-2021, but we do not currently assume skipping dividends if, in line with our projections, in 2020 net debt to EBITDA is close to 2.5x and gas markets are on a positive trend.

Company Description

Gazprom is the world's largest vertically integrated gas company by the volume of its reserves, production, exports, and transportation. At year-end 2019, its total proven hydrocarbon reserves were 126.1 billion barrels of oil equivalent (boe), of which 91% was gas. Gazprom's 2019 production was massive, at 11.1 million barrels per day in 2019, of which about 85% was gas. The company controls 172,600 kilometers (km) of gas trunk-lines. Gazprom's 96%-owned subsidiary, Gazprom Neft, is Russia's third-largest oil company, with a profitable production and refining business (see "Russian Oil Producer GazpromNeft 'BBB-' Ratings Affirmed Amid Lower Oil Prices And Oil Production Cuts; Outlook Stable," published May 19, 2020, on RatingsDirect). With 40 gigawatts of electric power generation capacity, Gazprom is Russia's leading electricity producer. The group also has equity stakes in other businesses, including Gazprombank, Russia's third-largest bank. All of Gazprom's key assets are located in Russia. The Russian government controls the majority of Gazprom, and the rest of Gazprom's shares are free float.

Historically, most of Gazprom's EBITDA came from gas exports. With ongoing pressures on gas markets, we expect a higher share of EBITDA coming from oil and domestic gas in 2020, with gas export EBITDA picking up in 2021 and beyond (chart 1).

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Chart 1

Peer Comparison

Table 1 Gazprom PJSC--Peer Comparison

Industry sector: Integrated oil and gas

Rosneft Oil Co. NOVATEK Royal Dutch Shell Gazprom PJSC PJSC PJSC Equinor ASA PLC Ratings as of June 8, 2020 BBB/Negative/A-2 (LC)* BBB-/Stable/-- BBB/Stable/-- AA-/Negative/A-1+ AA-/Negative/A-1+ --Fiscal year ended Dec. 31, 2019--

(Mil. US$) Revenue 122,963.9 138,125.1 13,896.3 64,358.0 344,877.0 EBITDA 33,025.2 30,649.7 4,404.3 24,945.0 57,940.0 Funds from operations 25,037.5 22,484.0 2,534.0 14,379.0 44,302.0 (FFO) Interest expense 3,836.2 5,862.6 171.7 2,409.0 5,594.0 Cash interest paid 2,754.6 4,509.7 131.1 1,203.0 4,896.0 Cash flow from operations 30,100.9 14,302.1 4,820.4 13,269.0 38,440.0 Capital expenditure 28,603.0 13,931.7 2,666.7 9,724.0 22,971.0 Free operating cash flow 1,497.9 370.4 2,153.7 3,545.0 15,469.0 (FOCF)

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Table 1 Gazprom PJSC--Peer Comparison (cont.)

Industry sector: Integrated oil and gas

Rosneft Oil Co. NOVATEK Royal Dutch Shell Gazprom PJSC PJSC PJSC Equinor ASA PLC Discretionary cash flow (4,617.8) (5,782.1) 348.4 (239.0) (11,628.0) (DCF) Cash and short-term 22,979.6 11,709.1 2,206.4 12,051.0 18,055.0 investments Debt 54,644.3 73,247.7 874.2 23,870.5 101,746.3 Equity 235,400.3 82,978.1 26,849.9 41,159.0 190,463.0

Adjusted ratios EBITDA margin (%) 26.9 22.2 31.7 38.8 16.8 Return on capital (%) 8.2 14.6 26.0 21.7 9.1 EBITDA interest coverage 8.6 5.2 25.6 10.4 10.4 (x) FFO cash interest 10.1 6.0 20.3 13.0 10.0 coverage (x) Debt/EBITDA (x) 1.7 2.4 0.2 1.0 1.8 FFO/debt (%) 45.8 30.7 289.9 60.2 43.5 Cash flow from 55.1 19.5 551.4 55.6 37.8 operations/debt (%) FOCF/debt (%) 2.7 0.5 246.4 14.9 15.2 DCF/debt (%) (8.5) (7.9) 39.9 (1.0) (11.4)

*Local currency (LC) rating: BBB/Negative/A-2; foreign currency rating: BBB-/Stable/A-3.

Compared with international peers, Gazprom is well positioned regarding the size of reserves and production, but very much focused on Russia, which we view as a high risk country, while international majors are well diversified by country. While Gazprom's credit metrics compared well with international peers in 2019, we expect it will be more exposed to the weak gas market in 2020 and potentially beyond, as illustrated by FFO to debt dynamics (chart 2).

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Chart 2

Business Risk: Satisfactory

Gazprom faces structural pressures on the European gas market. Compared with international majors and domestic peers, Gazprom is more exposed to gas market challenges, with 85% of its production being gas. Even before the pandemic, global gas markets were in structural oversupply due to a massive increase in LNG capacity, two warm winters (2018-2019 and 2019-2020), a relatively slow increase in global gas demand, and full storage, especially in Europe, leading to record low gas prices, well below most producers' full costs (see chart 3). In addition, gas prices are increasingly volatile, due to an increasing share of hub-linked pricing, broken historical correlation between gas and oil, and low price elasticity demonstrated by both supply and demand.

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Chart 3

We expect European gas markets to gradually rebalance after 2020, as low gas and oil prices eventually remove some high-cost production from the market. Although direct COVID-19-related demand destruction for gas is less pronounced than for oil (5% versus 9% in 2020 globally, according to the IEA's May 2020 report), the pandemic could affect future macroeconomic conditions and therefore, gas demand recovery. We believe that European gas demand may take time to recover to 2018-2019 levels, in line with GDP dynamics and because Europe aims to make a green agenda core to its post-COVID-19 economic stimulus package. S&P Global Ratings expects EU GDP to contract by 7.3% in 2020, followed by 5.6% growth in 2021 and 3.7% in 2022.

We believe that at least in the next five years, demand for Gazprom's gas is supported by Europe's falling indigenous production (notably, the large Groningen gas field should be closed by 2022). The plans to phase-out coal and nuclear generation in some European countries, paired with the lack of commercial energy storage solutions, supports the need for gas-fired baseload to complement intermittent renewables. Gazprom faces competition from other energy sources, notably renewables and cheap, but environmentally unfriendly, coal.

The longer-term future of gas in Europe will depend on post-pandemic economic recovery and on decarbonization policies to be adopted in line with the EU's 2019 "Green Deal," development of energy storage, and potential hydrogen solutions. We understand that although coal-to-gas switching reduces CO2 emissions about 2x, this might not be

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Low full costs, export sales structure, and diversification into oil, domestic gas, and electricity help Gazprom weather market pressures. In particular, we expect the following factors will support resilient profitability:

• Gazprom's export price realizations should be well above spot (as illustrated by management's expectation of $133 average realization compared with $70 spot and about $140 forward), because a large portion of sales are under long-term oil-linked contracts, or pegged to forwards that are above spot (chart 4).

• Gazprom's full costs are competitive in the global context, thanks to favorable geology, the cheap ruble, and existing infrastructure. We estimate Gazprom's total costs in 2020 conditions at about $75-$103 per thousand cubic meters (/mcm) (about $2.1-2.8/million Btu), including about $12/mcm production, $10 mineral extraction tax (down from $18 in 2018 due to the tax formula and cheaper ruble), $30-$50 transportation cost depending on the distance, and 30% export duty. We believe that marginal cost is even lower, closer to $60/mcm (1.6/mmBtu) depending on the destination, because a large part of transit cost is prepaid. According to our estimates, Gazprom's full cost is below that of many competitors, including some LNG suppliers and pipeline gas from the Southern Gas Corridor. The anticipated gradual increase in Gazprom's costs caused by the ongoing move to more difficult fields should be offset by regional tax holidays in Yamal and Eastern Siberia, and by the fact that export duty and mineral extraction tax are revenue-linked.

• Gazprom's profitable oil and electricity segments provide a solid and increasing contribution to the Gazprom group's EBITDA and essentially all of the group's consolidated FOCF while gas markets are depressed. In 2019, Gazpromneft's FOCF was RUB164 billion, compared with RUB93 billion for the consolidated group. The oil business benefits from low costs and revenue-linked taxes, and from our expectations of oil price recovery to $50 already in 2021. The electricity segment benefits from sizable capacity revenue and relatively low volatility of Russia's power market, and has limited capex needs.

• Domestic sales, which are low-margin, but stable. While historically, the Russian regulator set domestic prices well below export levels, the recent fall in export prices reduced the gap, when adjusted for 30% export duty and transit cost. Although other Russian producers--such as Novatek and Rosneft--supply about half the domestic gas needs, they focus on industrial customers and LNG, while Gazprom supplies gas to socially sensitive customers, addresses seasonal demand fluctuations, and has a legal monopoly on pipeline gas export which we don't expect will change in the next three to five years. We believe that the domestic gas market, and especially the power and heating segments served by Gazprom, is much less sensitive to COVID-19 pressures than exports. Domestically, vertical integration between gas production and transportation underpins Gazprom's critical importance to the Russian economy.

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Chart 4

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Chart 5

Massive size, vertical integration, and competitive costs support Gazprom's role in Europe. Gazprom benefits from a solid market share in Europe (36% in 2019). We believe that despite the current surge in LNG supplies to Europe, Gazprom's massive size and competitive full costs make it difficult to replace. Gazprom benefits from over 30 years of proven reserve life, with additional upside on probable and possible reserves, and significant underutilized capacity in production and export to Europe and Turkey (estimated at about 40-60 bcm in 2019).

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Chart 6

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Chart 7

High exposure to gas and low regulated domestic prices depress unit profitability. Gazprom's realizations per unit of production are below peers, because of higher exposure to lower-priced gas and to low (but stable) regulated domestic gas prices.

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Chart 8

Russia country risks, geopolitical, transit, and regulatory factors continue to constrain the rating. Gazprom's position as a large government-related entity (GRE) in Russia exposes it to the risks of negative sovereign interference and to geopolitical factors. We understand Russia's largest banks--Sberbank, VTB, and Gazprombank--as well as some of Gazprom's large construction counterparties, are sanctioned by the U.S. and the EU. In addition, we believe Gazprom faces political and regulatory pressures because of Europe's concerns about energy dependency on Russia.

The U.S. Protecting Europe's Energy Security Act, adopted in December 2019, imposes sanctions on entities providing services for the Nord Stream 2 pipeline construction, which delayed the commissioning of a 94% constructed pipeline. The German regulator's decision not to grant Nord Stream 2 exemption from the third-party access rule could additionally pressure profitability of the pipeline if and when it is commissioned. Still, we believe that the new transit contract signed with Ukraine in December 2019 (with capacity booking of 65 bcm in 2020 and 40 bcm in 2021-2025) and the recently completed 32 bcm Turkstream pipeline, leaves Gazprom with sufficient export pipeline capacity.

Financial Risk: Significant

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We believe that Gazprom has limited financial headroom for the rating, with 2020 metrics below our 30% FFO to debt threshold. We expect metrics to recover in 2021-2022 on the back of market rebalancing and the company's mitigating steps.

Gazprom has substantial flexibility in capex and asset disposals. This is illustrated by historical capex adjustments in line with operating cash flow (chart 9) and the sale of a 6.5% treasury stake in 2019 for RUB326 billion. We understand that Gazprom's management aims to bring metrics back in line with the company's financial policy of net debt to EBITDA below 2x, which corresponds to about 35-40% FFO to debt, and positive FOCF. Management has already announced cuts of RUB316 for capex and RUB140 billion for opex for 2020, and noted that 2021 capex could stay low if needed too.

In 2020, Gazprom plans to cut capex to RUB1.3 trillion, compared with 2019's peak of RUB1.8 trillion, to offset pressures on leverage, similar to most international oil majors. Also, 2019 was a peak capex year as Gazprom completed two major projects, the first stage of Power of Siberia (2,200 km pipeline and Chayanda gas field) and Turkstream (930 km, $7 billion, 32 bcm pipeline from Russia to Turkey and Southern Europe, via the Black Sea), and funded most of the €9.5 billion total project cost for Nord Stream 2. We understand that in 2020-2021, Gazprom will focus on maintenance capex as well as investments in projects in already committed projects, notably the second stage of Power of Siberia (including the Amur gas-processing plant, an 800 km link to the Kovykta gas field, loopings, and compressor stations) in line with its contractual obligations to ramp up gas supplies to China to 38 bcm by 2025.

Some of Gazprom's large noncore assets are potentially liquid; for example, equity stakes in Gazprombank or in the Russian gas producers Novatek, (valued at RUB211.2 and RUB380.3 billion, respectively, on Dec. 31, 2019). Furthermore, Gazprom has been historically able to sell stakes in its core upstream assets like Achimgas, and currently holds 96% of Gazpromneft while a 75%+1 share would be sufficient for essentially full control under Russian corporate law. We don't include these assets in liquidity sources at this stage because there is currently no strategy to sell them. We understand that although Gazprom plans to stick to its newly adopted dividend policy to increase payout to 40% and 50% of adjusted net income in 2021 and 2022, respectively, the absolute amount of dividends could decline if net income is low.

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Chart 9

Gazprom remains exposed to the risks of large Russian banks, where it keeps most of its sizable cash balances. In particular, out of RUB1.4 trillion of cash reported on Dec. 31, 2019, Gazprom keeps about RUB1.0 trillion with its equity affiliate Gazprombank. Although we view the Russian banking system as relatively weak, we continue to treat this cash as available for debt repayment, and therefore deduct it when calculating adjusted debt.

Longer term, we see risks related to joint ventures and a possibility of new strategic projects if and when gas markets stabilize. For example, Gazprom has decided to invest in the large Kharasavey gas field in Yamal (up to 32 bcm annual production), and may start new projects such as the western pipeline to China ("Power of Siberia-2") if a gas sales contract is in place, or a new large LNG or gas processing plant in Yamal. In addition, Gazprom has a number of joint ventures and undisclosed commitments under ship-or-pay arrangements with European gas pipeline operators. We understand that Gazprom will have only a 50% share in the large Ust-Luga gas-processing and LNG facility, so that most of the preliminary estimated RUB750 billion project cost will be at the joint venture level. Financial summary Table 2 Gazprom PJSC--Financial Summary

Industry sector: Integrated oil and gas --Fiscal year ended Dec. 31--

2019 2018 2017 2016 2015

(Mil. US$) Revenue 7,634,666 8,242,192 6,529,791 6,114,433 6,077,022

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Table 2 Gazprom PJSC--Financial Summary (cont.)

Industry sector: Integrated oil and gas --Fiscal year ended Dec. 31--

2019 2018 2017 2016 2015 EBITDA 2,050,492 2,622,949 1,536,911 1,530,130 2,048,137 Funds from operations (FFO) 1,554,542 2,145,043 1,147,907 1,251,242 1,775,097 Interest expense 238,187 249,802 223,801 225,772 292,192 Cash interest paid 171,028 173,174 161,455 183,312 168,311 Cash flow from operations 1,868,927 2,034,576 1,431,311 1,569,932 1,996,328 Capital expenditure 1,775,923 1,639,474 1,405,780 1,369,052 1,641,024 Free operating cash flow (FOCF) 93,004 395,102 25,531 200,880 355,304 Discretionary cash flow (DCF) (286,715) 206,789 (166,344) (117,457) 184,602 Cash and short-term investments 1,426,773 1,673,850 1,229,592 908,209 1,371,665 Gross available cash 1,426,773 1,673,850 1,229,592 1,094,475 1,503,257 Debt 3,392,789 2,907,629 2,685,497 2,185,669 2,783,719 Equity 14,615,687 13,776,153 12,015,481 11,441,839 10,914,622

Adjusted ratios EBITDA margin (%) 26.9 31.8 23.5 25.0 33.7 Return on capital (%) 8.2 13.6 7.8 6.8 11.2 EBITDA interest coverage (x) 8.6 10.5 6.9 6.8 7.0 FFO cash interest coverage (x) 10.1 13.4 8.1 7.8 11.5 Debt/EBITDA (x) 1.7 1.1 1.7 1.4 1.4 FFO/debt (%) 45.8 73.8 42.7 57.2 63.8 Cash flow from operations/debt (%) 55.1 70.0 53.3 71.8 71.7 FOCF/debt (%) 2.7 13.6 1.0 9.2 12.8 DCF/debt (%) (8.5) 7.1 (6.2) (5.4) 6.6

Reconciliation Table 3 Gazprom PJSC--Reconciliation Of Reported Amounts With S&P Global Ratings' Adjusted Amounts (Mil. US$) --Fiscal year ended Dec. 31, 2019--

Gazprom PJSC reported amounts

S&P Global Ratings' Cash flow Shareholders' Operating Interest adjusted from Debt equity EBITDA income expense EBITDA operations Reported 3,863,904.0 14,104,833.0 1,859,817.0 1,119,857.0 76,426.0 2,050,492.0 1,709,384.0

S&P Global Ratings' adjustments Cash taxes paid ------(324,922.0) -- Cash interest paid ------(171,028.0) -- Reported lease liabilities 247,513.0 ------Postretirement benefit 265,137.0 -- 9,271.0 9,271.0 7,245.0 -- -- obligations/deferred compensation

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Table 3 Gazprom PJSC--Reconciliation Of Reported Amounts With S&P Global Ratings' Adjusted Amounts (Mil. US$) (cont.) Accessible cash and liquid (1,426,773.0) ------investments Capitalized interest ------154,516.0 -- -- Dividends received from -- -- 181,404.0 ------equity investments Asset-retirement 223,916.0 ------obligations Nonoperating income ------298,053.0 ------(expense) Reclassification of interest ------93,543.0 and dividend cash flows Noncontrolling -- 510,854.0 ------interest/minority interest Debt: Guarantees 219,092.0 ------Operating cash flow: Other ------66,000.0 Total adjustments (471,115.0) 510,854.0 190,675.0 307,324.0 161,761.0 (495,950.0) 159,543.0

S&P Global Ratings' adjusted amounts

S&P Global Ratings' Cash flow Shareholders' Operating Interest adjusted from Debt equity EBITDA income expense EBITDA operations Adjusted 3,392,789.0 14,615,687.0 2,050,492.0 1,427,181.0 238,187.0 1,554,542.0 1,868,927.0

Liquidity: Adequate

We view Gazprom's liquidity as adequate, based on our estimate that liquidity sources will cover liquidity uses by more than 1.2x in the 12 months starting Dec. 31, 2019, and closer to 1.0x in the second year. We believe that Gazprom has generally prudent risk management and good access to financing from domestic state-owned banks. Compared with other Russian entities, Gazprom is relatively well positioned to access international capital markets as a GRE, exporter, and one of the largest Russian borrowers. Gazprom is not currently subject to any financial sanctions by the U.S. or EU, unlike its subsidiary Gazprom Neft or its affiliate Gazprombank. Nevertheless, we believe that, in line with other Russian issuers, Gazprom's access to international capital markets could be affected by geopolitical factors. We also note that the company is heavily exposed to large Russian banks where it keeps most of its cash balances (mostly Gazprombank).

Gazprom's key liquidity sources and uses for the 12 months started Dec. 31, 2019 are listed below.

Principal Liquidity Sources Principal Liquidity Uses

• Cash of RUB696 billion, short-term financial assets • Short-term debt of RUB774 billion; another RUB448 of RUB57.6 billion, short-term deposits of RUB673.1 billion matures in the second year. billion. • Capex of about RUB1.3 trillion.

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• About RUB570 billion of funds raised in • Dividends of RUB367 billion on 2019 income, as January-May 2020, including $2 billion of approved by the board. Eurobonds placed in February, €1 billion Eurobond placed in April, €3.1 billion long-term loan for Amur gas processing plant, RUB40 billion in domestic bonds, RUB30 billion and €150 million Russian bank debt, and €87.5 million long-term funding from European energy companies for Nord Stream 2. • About RUB150 billion of available committed long-term bank lines. • Our expectation of FFO of about RUB0.9 trillion-RUB1 trillion.

Debt maturities Table 4 Gazprom PJSC--Debt Maturities*

Period Bil. RUB 2020 774.2 2021 448.8 2022 711.0 2023 547.6 2024 378.6

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Environmental, Social, And Governance

Similarly to oil and gas peers, the future of Gazprom's core business is significantly shaped by environmental factors, notably the EU's targets to achieve net-zero emissions by 2050. CO2 emissions from natural gas are about twice below coal, although methane leaks also have a powerful greenhouse gas effect. How long Europe continues to use gas as a bridge low-carbon baseload complementing intermittent renewables, will depend on the development of energy storage and on the implementation of the 2019 "Green Deal." Any regulations on gas infrastructure, gas-fired generation, or mixing natural gas with hydrogen in existing pipelines will also be a factor. On the other hand, the focus on transitioning from coal to cleaner gas fuel in China and other Asian markets will create future export opportunities for Gazprom. With about 90% of production being gas, Gazprom:

• Ranks below most oil majors on CO2 emissions for its gas business (including its vast gas network but excluding electricity generation segment); • Is in compliance with applicable environmental regulations; • Has publicly communicated targets to reduce greenhouse gas emissions; and • Is working on gas decarbonization technologies, such as hydrogen.

Gazprom's export business is also exposed to social sensitivities and political concerns about European dependency on Russian gas (36% of Europe's gas in 2019, and well over 50% in some Eastern European countries). Gazprom's role as a provider of gas for domestic needs, a large employer, and a big customer for certain local industries is typical of large Russian GREs. This might reduce the company's flexibility in opex and capex, but also creates incentives for government support.

On governance, similarly to other large Russian state-owned companies and to oil majors operating in emerging markets, Gazprom is exposed to contracting and execution risks on a number of large projects and joint ventures, such as the finalization of Nord Stream 2, the Ust-Luga LNG project, and potentially the next stages of Power of Siberia and the Amur gas processing plant. Also, we note reported spending inefficiencies, corruption allegations, and a lack of transparency in certain transactions. Gazprom is a public joint-stock company, with a relatively autonomous management team and the majority of board members representing the government. Gazprom's IFRS disclosure is comparable with peers' in terms of timeliness and detail.

Government Influence

We expect Gazprom to continue enjoying an extremely high likelihood of extraordinary state support, reflecting our view of:

• Gazprom's critical role for the Russian economy as the owner of Russia's gas-transportation network and supplier of gas to domestic customers, and as one of the country's largest exporters, taxpayers, employers, and borrowers. Gazprom is one of the government's key assets in the country's strategic hydrocarbon sector, and the country's largest corporate borrower on the international debt market. In our view, if Gazprom were to default, it would have material negative consequences for the government and other Russian companies and financial institutions.

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• Gazprom's very strong link with the Russian government. By law, state control of Gazprom cannot fall below 50%. We understand that the government is actively involved in defining the company's strategy, as illustrated by the government's heavy involvement in Ukraine transit negotiations, and has a track record of support to various systemically important entities. Still, the government only controls a marginal majority stake, and the company's operations are sizable and fairly autonomous. The Russian economy relies heavily on oil and gas, which may increase the correlation between the financial performance of Gazprom and Russia.

Issue Ratings - Subordination Risk Analysis

Capital structure Gazprom's capital structure includes mainly parent-level debt (including loan participation notes [LPNs] issued by Gaz Capital S.A. and Gaz Finance PLC, Russian bonds, and bank debt). Of RUB3.9 trillion total reported debt as of Dec. 31, 2019, we estimate that much less than 50% was priority-ranking at the subsidiary level. Loan participation notes issued via Gaz Capital under the medium-term note program equaled about half the group's total reported debt.

Analytical conclusions The rating on the LPNs mirrors the long-term foreign currency issuer credit rating on Gazprom. We understand that the LPNs are backed by Gazprom's senior unsecured obligations with equivalent payment terms, and that Gaz Capital S.A. as well as Gaz Finance PLC are strategic financing entities for Gazprom set up solely to raise debt on behalf of the Gazprom group. We believe that Gazprom is willing and able to support Gaz Capital and Gaz Finance to ensure full and timely payment of interest and principal when due on the LPNs, including payment of any expenses of those financing entities.

We rate the notes in line with our issuer credit rating on Gazprom, because no significant elements of subordination risk are present in the capital.

Ratings Score Snapshot

Issuer Credit Rating Foreign Currency: BBB-/Stable/A-3 Local Currency: BBB/Negative/A-2

Business risk: Satisfactory • Country risk: High • Industry risk: Intermediate • Competitive position: Strong

Financial risk: Significant • Cash flow/leverage: Significant

Anchor: bbb-

Modifiers

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• Diversification/portfolio effect: Neutral (no impact) • Capital structure: Neutral (no impact) • Financial policy: Neutral (no impact) • Liquidity: Adequate (no impact) • Management and governance: Fair (no impact) • Comparable rating analysis: Neutral (no impact)

Stand-alone credit profile : bbb- • Group credit profile: bbb- • Related government rating: BBB • Likelihood of government support: Extremely high (+1 notch from SACP)

Related Criteria

• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019

• Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018

• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017

• General Criteria: Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015

• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014

• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013

• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013

• General Criteria: Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions, Nov. 19, 2013

• General Criteria: Methodology: Industry Risk, Nov. 19, 2013

• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012

• General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010

• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009

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Business And Financial Risk Matrix

Financial Risk Profile Business Risk Profile Minimal Modest Intermediate Significant Aggressive Highly leveraged Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+ Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb

Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+ Fair bbb/bbb- bbb- bb+ bb bb- b Weak bb+ bb+ bb bb- b+ b/b- Vulnerable bb- bb- bb-/b+ b+ b b-

Ratings Detail (As Of June 8, 2020)* Gazprom PJSC Issuer Credit Rating Foreign Currency BBB-/Stable/A-3 Local Currency BBB/Negative/A-2 Senior Unsecured BBB- Issuer Credit Ratings History 27-Feb-2018 Foreign Currency BBB-/Stable/A-3 21-Mar-2017 BB+/Positive/B 20-Sep-2016 BB+/Stable/B 27-Mar-2020 Local Currency BBB/Negative/A-2 27-Feb-2018 BBB/Stable/A-2 21-Mar-2017 BBB-/Positive/A-3 20-Sep-2016 BBB-/Stable/A-3 Related Entities Gaz Capital S.A. Senior Unsecured BBB- Gaz Finance PLC Senior Unsecured BBB- Gazprom Capital OOO Issuer Credit Rating Foreign Currency BBB-/Stable/-- Local Currency BBB/Stable/-- Gazprom Neft PJSC Issuer Credit Rating BBB-/Stable/-- Senior Unsecured BBB- GPN Capital S.A. Senior Unsecured BBB- Mosenergo PJSC Issuer Credit Rating BBB-/Stable/-- Sogaz Insurance Financial Strength Rating Local Currency BBB/Stable/--

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Ratings Detail (As Of June 8, 2020)*(cont.) Issuer Credit Rating Local Currency BBB/Stable/-- TGC-1 PJSC Issuer Credit Rating BBB-/Stable/A-3 *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings’ credit ratings on the global scale are comparable across countries. S&P Global Ratings’ credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.

Additional Contact: Industrial Ratings Europe; [email protected]

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