Why Gazprom Has Plenty of Fuel Left in the Tank.
Gazprom (Ticker OTCPK:OGZPY) has surged 75% this year, to a five year high of $7.85. While this might seem like a lot, there is plenty of reason to believe the advance has further to go.
A little about Gazprom.
Gazprom is a large Russian natural gas and oil producer; its revenues represent over 7% of Russia’s GDP alone.
In recent years, Gazprom has been busy expanding its pipe network across Europe and Asia, with plans to supply 25% of China’s gas imports by 2035. In early 2019, Gazprom secured a record share of the European gas market and now supplies 36.7% of their gas (Reuters, 2019). They are Europe’s primary provider.
Why the recent surge?
In response to the Kremlin’s demands that state owned enterprises (Gazprom is 50.2% Russian Government owned) payout 50% of their profits, Gazprom doubled its dividend in 2019. The surge in share price followed shortly after the announcement (The Moscow Times, 2019).
Are we entering a Gas Golden Era?
Worldwide demand for gas is growing. In 2018, global consumption was up 4.6% (IEA, 2019), its strongest increase since 2010. The gas consumption growth rate for the last two years was triple the global population growth rate. About a quarter of this growth is accounted for by China, a key long-term customer of Gazprom.
There is also a movement across Europe and China away from coal and towards gas and other renewables. The shift from coal to gas is great news for Gazprom, it accounted for 20% of the rise in global gas demand last year (IEA, 2019).
Gazprom is good at making money.
Gazprom has been growing top-line revenue at over 5%* annually for the last 5 years and pulled in $118B in 2019, at an 18% profit margin.
Return on Equity is 10.3% and Gazprom invests heavily in infrastructure for the future. Lately much of this has been in its tentacle-like pipeline network across the continent. Capital Expenditure is over 20% revenue annually.
Of some of the biggest names in oil and gas globally (including Saudi Aramco, Sinopec, ExxonMobil, Shell, BP and Chevron) Gazprom had the second highest count of granted patents in the last 2 years (Google Patents, 2019). Patent innovation can be a leading indicator of future growth potential.
*Compound annual growth rate
It’s a 50c dollar.
For years Gazprom was trading at a quarter of its fair value, today it’s 50 cents on the dollar. Historically there has been some concern that Gazprom’s growing profit margins may never enter the investors pocket, but the recent dividend doubling eases this concern somewhat.
Gazprom’s growing dividend payout justifies a much higher valuation than the current $7.85 share price. Here we assess valuation looking at:
- Discounted Cash Flows (DCF)
- Tangible Asset Value (TAV)
A conservative discounted cash flow analysis gives a fair value for Gazprom around $16.50. 110% more than the current trading price.
This assumes far greater adoption of renewables than is currently expected; nil revenue growth for the next 5 years and negative 5% annually in perpetuity thereafter.
Looking at the balance sheet alone, Gazprom has a tangible asset value of $14.90. In other words, if they were theoretically acquired and then liquidated (with all assets and liabilities sold off) they would be worth $14.90 a share, 90% more than the current trading price.
In terms of undervaluation, it’s hard to beat Gazprom.
It’s Technically Good.
This is the beautiful part. Gazprom has been undervalued for years, so why buy today? The price spike of 2019 shows a change of sentiment. Investors are now willing to dip their toes into Gazprom.
Statistically, stocks that are trading at 12-month highs, perform better in the long term than otherwise. So the 2019 price spike is actually another good reason to consider investing in Gazprom.
Looking back over the last 4 years, Gazprom failed to break above $5.3 (a technical “resistance” line). Making any buy above $5.3 a good entry point into Gazprom. That line was breached in 2019, and since then Gazprom rocketed up. Where is the next resistance? Potentially around $9.1 where historically there has been a lot of price action. It would not be surprising for Gazprom to range in this area for a time. Beyond that, the air is clear.
Arguably the most important thing to look at from a technical perspective is momentum. Momentum is the trend (up or down) of a stock’s price. Gazprom has been in a downward trend, below the 200 Day Moving Average (DMA), for most of the last decade. However, recent spike above the 200DMA has put Gazprom back into “buy” territory. This is a classic example of what Jim O’Shaughnessy would call:
“a cheap stock on the mend”.
Cheap from its fundamental valuation, with price appreciation on the mend.
Risky business?
As a majority state owned business, Gazprom has been the target of foreign sanctions and Trump tweets against the Nord Stream 2 pipeline project. It’s fair to say Gazprom stock fell off a cliff in 2014 with falling oil prices and Russia’s regrettable actions towards Ukraine. Any further untoward actions would not be good for Gazprom. Nonetheless, assuming logic prevails, the worst should be behind us.
The US has also been getting its hands into the European gas market with LNG. While LNG imports have grown significantly in Europe, LNG is 20–40% more costly than Russian gas to import (The Economist, 2018) and therefore not considered a major competitive threat at present.
There is also growing local competition from other Russian producers including Novatek and Rosneft. Putin’s vested interest in Gazprom should offer some security in this regard.
Finally, being a commodity exporter, Gazprom is subject to swings in the oil and natural gas prices which directly impact their bottom-line.
Wrap
Gazprom is a stable business with long-term continental demand, it has weathered great volatility in commodity prices and continues to invest in the future through its vast pipeline network.
The best thing about Gazprom is the strong alignment of fundamental value and technicals, both of which point towards further potential price appreciation over the coming years.
Like all investments, Gazprom does not come risk-free. However, the Author is satisfactorily compensated by the fact Gazprom is currently trading at half-price.
Disclaimer
The Author has held Gazprom stock since 2018.
This content is for informational purposes only and is not intended to be a source of investment advice. It is important to do your own analysis before making any investment based on your own personal circumstances.
