Gazprom’s Undervalued Potential
Gazprom holds the world’s largest natural gas reserves, which make up 18 percent of global reserves. The company accounts for 14 percent of global gas output and 74 percent of Russian gas output, and it also owns the world’s largest gas transmission network. According to the 2014 Fortune 500 ranking Gazprom is the 17th biggest company in the world, based on revenues.
Gazprom’s share price has been suffering over the last few years. It peaked in 2008 at around $30, and then fell precipitously to around $6.50 during the financial crisis. After such, it started to recover and climbed back to around $16.80 in April 2011, but then it started to decline and has been grinding lower ever since. The current share price is around $6, which is lower than it was at the bottom of 2008.
The Financial Factors
Based on traditional valuation ratios Gazprom appears cheap. Over the last few years it has been trading at a price/earnings ratio between 2-3. Currently, however, the ratio is around 22 because net profits fell approximately 86% in 2014. Non-cash items related to Ruble depreciation in 2014 heavily impaired net profit, however they did not damage free cash flow, which actually increased year over year.
The price/book ratio currently stands at around 0.4 and has been trading around 0.3-0.4 for the last two years. Price-to-sales is currently 0.6 and price-to-free cash flow is around 6.
Gazprom’s revenues have been growing at a compound annual growth rate of around 12.3 percent for the last 8 years. From 2006 to 2013 net profit grew at a compound annual growth rate of about 9.5 percent, however as mentioned above, profits fell substantially in 2014. Return on equity has consistently been above 12 percent since 2006, however in 2014 it dropped to 1.66 percent.
From a balance sheet perspective the company is strong. The debt/equity ratio is 0.23 and has hovered between 0.13 and 0.25 for the last eight years. The current ratio is approaching 1.9 and has generally stayed above 1.5 for the last eight years, which is a good level. Both from a short and long-term financing perspective, Gazprom appears a solid company.
Moreover, the dividend yield of the company is currently 6.6 percent, compared to around 2.2 percent for the S&P 500. In other words, Gazprom is paying out 3 times as much in dividends as the average S&P 500 company.
Lastly, according to Gazprom’s 2014 annual report, DeGolyer and MacNaughton, the Dallas based petroleum consulting company, performed an audit of Gazprom’s reserves and concluded that the present value of those reserves equated to USD 316.3 billion. Gazprom is trading at a 77.4 percent discount to the value of its estimated reserves. Even if the value of those reserves turns out to be half of what was reported, the company would still be trading at less than 50 percent of the value of its reserves.
The Qualitative Factors
One of the primary concerns for foreign investors looking to invest in Russia is corruption. There has been talk of members of the Gazprom management siphoning off money to themselves, which hampers investor sentiment and is of concern. However, Gazprom has improved considerably over the past 15 years. Before Putin took Gazprom under his wing in 200,0 the Chair of the company, Viktor Chernomyrdin, had stripped the company of many assets and sold it to family and friends of the board. However, after he was ousted in 2000 the company began its transformation and Alexei Miller was named CEO, and remains in that position to this day. The looting ended and Gazprom started to regain its strength.
One can debate if the company is still corrupt, however Gazprom is an important part of Putin’s plan to strengthen Russia’s position on the world stage and from his past actions Putin seems to understand that if Gazprom is to remain strong it cannot have board members selling off valuable assets to family and friends at a discount.
The Macro Picture
It’s impossible to talk about Gazprom without mentioning natural gas prices and the future of Russia. Oil is the essential fuel of the modern economy, but natural gas also plays an integral part. There will therefore be demand for Gazprom’s product in the years and decades to come, no matter what the price is. The long-term prospects of the company are therefore favorable.
In terms of geopolitics, investing in Russia is obviously more risky than investing in developed economies. However, people tend to overlook Russia’s financial position is less shaky than one would assume. Debt/GDP is only around 13 percent, compared to around 100 percent in the US. The country has adequate foreign reserves, despite using some lately to prop up the Ruble. The country also has vast natural resource reserves and has economic and geopolitical ties with China, Brazil, India and Iran. There is no doubt Russia has been suffering lately, but anyone who cares to look a little closer can see that the country is doing better than our own preconceived notions.
Conclusion
Gazprom has been experiencing troubles lately due to the geopolitical and macro economic factors surrounding the company. However, on a long term basis the future appears bright, due to the importance of natural gas in the world economy. From a valuation perspective Gazprom looks undervalued and investors that are comfortable with the risk of investing in Russia, and the oil and gas sector, might see this as a good buying opportunity
AI
