OREANDA-NEWS. Gazprom's EUR2bn (RUB162bn) five-year loan from the Bank of China will only go a small way to covering its funding needs over the next few years, as debt maturities and operating funding needs are likely to eat into the group's large cash buffer, Fitch Ratings says. The loan represents around 12% of the RUB1.3trn we estimate Gazprom will need in the next two years, comprising RUB900bn in debt maturities and RUB400bn to cover Fitch's negative free cash flow (FCF) forecast. Gazprom may respond by cutting capex or delaying projects, such as liquefied natural gas (LNG) plants, and lowering dividends.

Gazprom's current liquidity is strong. Including subsidiaries such as Gazprom Neft and Mosenergo, the company had nearly RUB1.5trn in cash and committed credit facilities at end-2015. But with reduced access to international capital markets, insufficient scale and depth of domestic capital markets and still high domestic borrowing costs, we expect its liquidity to weaken gradually in 2016 and 2017. This is exacerbated by lower gas prices and flat sales volumes on one hand and high capital investment requirements on the other. Leverage will also rise - we expect funds from operations-adjusted net leverage to nearly double by end-2016 on end-2014 levels and remain just under 1.9x over the medium term. Despite this deterioration, we expect metrics to remain in line with Gazprom's BBB-/Negative credit rating, constrained by Russia's sovereign rating.

Gazprom's key investment projects include modernising existing pipelines and constructing new ones in Russia, as well as its Eastern gas programme - developing two Eastern Siberia gas fields and constructing a 38 billion cubic metre (bcm) capacity gas pipeline to China. While we believe the Eastern gas programme will go ahead as planned, other projects are likely to be postponed or even cancelled. Projects that could be affected include the planned Baltic LNG plant and potentially even the Nord Stream 2 pipeline. Gazprom's domestic gasification program may also be scaled down.

Gazprom increased its gas exports to Europe (including Turkey) by 12bcm to 167bcm in 2015. The company also increased its European market share to 31%, due to lower production in countries such as the Netherlands. Its average European gas price in 9M15 fell nearly 30% to USD252 per thousand cubic metres (mcm), and is still falling with a time lag on lower oil product prices. Gazprom should maintain its European volumes, but we expect the average price to be below USD200/mcm in 2016-2017 under our recently revised oil price assumptions of USD35 per barrel in 2016 and USD45 in 2017.