Friday 18 April 2014

Analysis of Gazprom

A Russian energy company

Company: Gazprom

Business: A Russian energy company that are sitting on 18 % of the worlds calculated gas reserves. They are active within several fields and to just mention a few: Geological Exploration, Gas Production, Gas Transportation, Storage of Gas, Processing & Sales of Gas as well as Marketing of of Heat and Electric Power.

Active: Main activity is Russia but they are a large exporter of gas via their 168.000 km gas pipelines and are therefore present in 30 countries. Is a major player in Europe since several countries buy the gas from Gazprom.

P/E: 2.6

contrarian values of P/E, P/B, ROE as well as dividend

The P/E of Gazprom is insane low with 2.6 and the P/B follows suit with 0.4 which gives us a very, very clear buy according to Graham! Their earnings to sales are excellent with 25% even though the ROE is ok but not more with 14%. The book to debt ratio is also great with 2.5. In the last five years 2008-2012 (annual report for 2013 still not out) they have had a yearly growth of +13.7% which is spectacular and this gives them a motivated P/E of 30 to 35 which means they are highly undervalued on the market today. They pay a very nice dividend of 4.6% which represents only 12% of their earnings so plenty of space for improvement!

Conclusion: Both Graham and I say yes to Gazprom. It is simply too cheap today with a very nice dividend being paid out while waiting for the market to realise that maybe Gazprom is not so bad after all. But then again... maybe they have already used up their entire gas reserve before that has happened but I would still be happy to collect dividends even if the market never would make a correction. My biggest fear is corruption and the negative consequences that comes from that. It will be interesting to see how 2013 turned out for them and most likely 2014 will not be a good year due to the conflict with Ukraine and the coming sanctions from Europe and US.

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Anonymous said...

Hi there!

I have some issue with your recommendation for 'GO" for Gazprom. Based on your analysis I agree that this company looks like a good target to invest but...

1) Gazprom from many years is the biggest company in Russia and is responsible for generating of 20% of governmental budget. Gazprom is also fully controllable by Putin and his political environment. It means that Gazprom is, will be (and many time was) used as a political weapon against other countries importing gas from Russia and as a money donor for Russian budget at any time on “request” of government. It automatically creates uncertainty regarding Gazprom future grown, investment strategy, profitability etc…

2) Strictly linked with point no 1. – in Russia many times the megalomania of the government means big spectacular projects, investments made only for “show” as a symbol of power with no economic rationale behind. It happen non-stop in soviet Russia in the past and this approach is still on-going – see current huge investment in Sochi for Olympic games. Unfortunately Gazprom is a part of the “game”. The company is forced to performed huge investments in infrastructures against economic analysis. We can discuss here about North Stream and South Stream pipelines. The first one was built to bypass transfer of gas from Russia to EU thru territories of Poland and Ukraine. The reason for such move was not the uncertainty of the stability of both countries but the wish of Kremlin to create possibility to stop the gas flow to CE countries (to blackmail them in case of the need) without harming the export of gas to “old” EU countries. It will also block the possibility for Poland and Baltic countries to build in the future pipeline to export the gas from Norway. The investment cost was approx. 15 billions of USD and right now flow capacity of the North Stream is utilized only to limited extend. Same will most likely happen to so called South Stream. It is rather a project to reduce future profitability of the Nabucco project. The aim of the Nabucco pipeline is to diversify the natural gas suppliers and delivery routes for Europe, thus reducing European dependence on Russian energy. Gazprom = Russia wants to spend over 21 bln USD just to block the Nabucco pipeline development by influencing the NPV calculations of the project. At the same time nobody worries about NPV calculations for South Stream. I just wonder how long and how much of gas you need to transfer via this pipeline to Europe to recover your investment. Especially when you already have three more pipes with the gas (Jamal, Nord Stream and Transgas) not operating already at the full capacity? And please, keep in mind that North and South Streams are only few of Gazprom’s investments in last few years that makes limited economic sense.

3) Recent development of the situation on Ukraine creates additional thread to long term stability of Gazprom. The company is right now strongly dependent from its customers in EU. Till now countries of “old EU” seen “Gas blackmail” as a limited threat (except post-soviet countries such as Poland, Lithuania etc. all this countries were lobbing in EU to increase “energy security” of all members of EU since years). Conquest of Crimea by Russian changed this approach and provoke EU to finally look for diversification of energy sources strategy. In the long term run the strategy will cause the decrease of import of the gas from Russia and Gazprom markets in EU will shrink significantly.

If you look upon Gazprom as a short term investment, it might be a good target. But I am very sceptic if the comany is a good long term investment target.


Fredrik von Oberhausen said...

I like this comment very much from M and I hope that all of you will read it! The reason why I like it because this is exactly how things must be! Each and every one of us have to think for ourselves and make our own investment decision based on our moral and our gut feeling for what we consider to be correct companies to invest in and to support.

Since I am sitting in Berlin and in my apartment I have gas for cooking, gas for heating my apartment as well as for producing hot water so I am probably even worse in the sense that I am certain that I support Gazprom already as a client. To make things worse I am afraid that I have little possibilities to go around that and using and buying a product from a questionable company is in my opinion worse than to be a shareholder in the very same company.

I am sure very few shareholders feels guilty for being a shareholder in McDonalds or any sweets producer for that matter when we know today all the health issues that are arriving with too high kcal containing “foods” and we can very easily calculate how many people are being killed due to that. I personally decide not to buy and use the products since I want to live long but I would not stop for a second to think about stepping in as investor in McDonalds when the P/E would be low enough for my liking.

1. Yes, I am certain Gazprom is being used like that but I will never be able to change that and if the budget to mother Russia is forced out as dividend then every other shareholder will also receive it. If no then it will be illegal but at least the Russian government will not fine them due to it. So if it less than what the banks in the US have to pay in fines for their illegal moves or if it is less than what BP is forced to pay for their tremendous “blunder” with Deep Horizon then one way or the other it only becomes part of the calculation both for the management and any shareholder that steps in on how much is needed to pay the Russian government and it can be classified simply as a tax. Maybe one day in the future 5, 10, 20 years from now the corruption will be equally low in Russia as it is in Europe and then the risk of owning the company will significantly decrease which will then also most likely increase the value.

2. Good information. I did not know these things. Thanks! I know that even Poland is considering to go for shale gas which they are supposed to have and they want to do that due to that they want to break free from the gas from Russia. Hmmm... Maybe I am wrong now but based on what you write then it could make financial sense to spend 21 billion USD to block the Nabucco line but I would not even know where to start to try to perform that calculation.

3. It is good that Europe try to diversify. It will be good for the price of gas, as well as the stability of the energy supply. I am sure that Gazprom will be forced to decrease their prices at some point and most likely they will be forced to do that before they run out of gas which they will do at some point of time.

I do not know what the future holds for Gazprom. I do not judge countries, the management, and the future of the company’s products. I usually look at their five year past revenues and their present figures. If they at the present are being traded cheap then that comes out in my contrarian analysis. Each and every one of you has to make your own analysis and moral judgement on top of that on each company before even considering to step in as an investor.