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GDF Suez: a match made in Paris

One year on from its controversial merger GDF Suez is defying the doubters with positive results, writes NJ Watson

IT HAS BEEN almost a year since the politically motivated merger of Gaz de France and Suez was completed to widespread disapproval across the EU and the investment community. But judging from recent results, the new entity is standing up well to the global economic turmoil.

By all accounts, GDF Suez had a positive first quarter. "It was excellent and well in excess of expectations," says Stephane Lacaze of Paris-based Oddo Securities.

Core profits, or earnings before interest, tax, depreciation and amortisation (Ebitda), rose by 14.7% from the year-earlier period to €5.3bn ($7.4bn), which compared favourably with the consensus estimate of just €4.8bn. GDF Suez attributed the rise to non-recurring events such as the sharp fluctuation in fuel prices, which only moderately affected exploration and production (E&P) activities, while providing arbitrage trading opportunities during a particularly cold winter in Europe.

But merely attributing the good results to one-off favourable conditions such as the weather misses the point. Analysts note that GDF Suez manages to make the most of its positions whatever the year, such as in 2008 when the winter was very mild, yet earnings also easily beat forecasts because of highly profitable liquefied natural gas (LNG) sales in Asia. "GDF Suez appears to produce positive non-recurring items each year," says Lacaze.

The group's sales during the period rose by 11.7%, to €25.6bn, also well in excess of the consensus forecast of €24.2bn. Some 10% of this rise was the result of organic growth – not attributable to acquisitions – which is an achievement during a time when industrial production is dropping sharply worldwide. The main engines of growth were the Energy France (up by 21.3%), Global Gas & LNG (up by 18.9%) and Infrastructures (up by 39.8%) divisions.

The results prompted the firm to make mildly optimistic sounds about the future, stating an Ebitda target for 2009 higher than the 2008 figure. This should be easily achievable; Paris-based Natixis Securities says its "conservative" Ebitda estimate for 2009 of €14.6bn (compared with €13.9bn in 2008) would be achieved even if no growth were recorded during the next three quarters. GDF Suez is still targeting Ebitda of €17bn-18bn in 2011.

While management has come under fire for exercising stock options amid a general outcry in France over executive bonuses – chief executive Gerard Mestrallet told shareholders in May that the group's executive board members would give up their options in 2009 – it has shown a surer hand over the group's finances.

In March, the management indicated that the €10bn of bonds issued in the months after Lehman Brothers went bankrupt in September would not be splurged on acquisitions, but instead used to extend the maturity of the company's debt without increasing its cost. By the end of March, net debt had inched lower to €27.8bn, from €28.8bn at the end of 2008, despite capital expenditure of €2.6bn in the first quarter. As such, the company is viewed by many investors to be one of the most defensive stocks in its sector, so the shares trade at a premium to that of its peers – a 2010 price/earnings ratio of 11.3 compared with an average 9.5 for the sector as a whole.

Much of GDF Suez's resilience can be attributed to its sheer size and diversity of revenue. That size, of course, is directly attributable to the merger last July that created the largest electricity and natural gas group in Europe – the aim of French President Nicolas Sarkozy, who wanted a national champion along the lines of Germany's E.On and protection for GDF from foreign control. Yet this state intervention could create the group's greatest weakness.

The French state is now GDF Suez's largest shareholder, with 35.7% (the other main shareholders are Groupe Bruxelles Lambert; 5.3%; staff, 2.8%; CDC, 1.9%; Areva, 1.2%; and CNP Assurances, 1.1%). "Under French law, a shareholder who holds more than a third of the capital can block any decision being taken by the extraordinary general meeting. In addition, seven directors of GDF Suez are representatives of the [French] state. The result, says Global Markets Direct, a research company, in its latest Swot (strengths, weaknesses, opportunities and threats) analysis, is that the government may interfere in the company's activity.

GDF Suez is active across the entire energy value chain, upstream and downstream, from natural gas to power generation. It is the fifth-largest electricity producer in Europe, with 68.4 gigawatts (GW) of installed capacity, 20 GW of capacity under construction and 277 terrawatt hours generated in 2008. In gas, the company is the largest buyer in Europe and largest LNG importer in the US with a total supply portfolio of more than 100bn cubic metres (cm). GDF Suez also retains a 35% stake in Suez Environnement, the second-largest supplier of environmental services in the world.

Growing upstream focus

The company is increasing its upstream focus, doubling 2008 production from the year before to 10.8m barrels of oil equivalent (boe). The group's aim is to acquire proved and probable reserves of around 1.5bn boe over the next few years.

Norway is a centre for GDF Suez's E&P activities, accounting for about half of its 0.7bn boe in reserves. In April, GDF Suez E&P Norge won another Norwegian production licence to add to its existing 17. In the Barents Sea, the company is a partner in StatoilHydro's Snøhvit liquefied natural gas development. Outside Europe, GDF Suez plans to invest around $1.31bn developing its Algerian Touat gasfield, estimated to hold reserves of around 70bn cm.

The company's diversification strategy is not only about geography – it already has a presence in about 30 countries – but also in its business operations. GDF Suez is diversifying its power-production base with renewable energy sources such as biomass, wind and solar. It is also trying to edge its way into the highly controversial, but potentially lucrative and strategic Russian project to build a gas pipeline under the Baltic Sea directly to Germany – although the success of Nord Stream is far from assured. With costs escalating, the project also faces regional environmental and political opposition.

In May, Gazprom's deputy chief executive, Alexander Medvedev, said GDF Suez is in discussions over joining the consortium building the pipeline and may decide by the end of the summer to join the project. The attraction of participation in Nord Stream is obvious: when the pipeline is completed, scheduled to be 2011, it will deliver up to 55bn cm/y to the EU. Securing a share of that volume would help GDF Suez fulfil a large proportion of its 100bn cm/y of supply requirement for many years to come.?

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