Replies to post #223 on PJSC Gazprom Adr. (OGZPY)

[Lady-baron]

Hated Russia And Gazprom A Great Value Play

Sep. 3, 2015 4:08 PM ET | About: Gazprom OAO ADR (OGZPY)

Russia growth for the year up almost 15 percent.
Gazprom is a great value play, as it continues to throw off strong earnings.
The ruble and lower export taxes are the main catalysts behind its performance.
Even though Russia has been reportedly pressured from the plunge in oil prices and economic sanctions from some countries, it has in fact held up well, up approximately 15 percent so far in 2015, making it among the best economic performers of the year.

Based upon long-term Cyclically Adjusted Price Earnings, it is now the second-cheapest market in the world at this time. It's now trading at a P/E of close to 4.8, and has a price-to-book ratio of 0.7.

When compared with the MSCI Emerging Markets Index, it trades at approximately half that level, moving it into a value play for investors willing to hold for the longer term.

With Russia hated and inexpensive, it's definitely time to take a closer look.

As a major Russian play we'll look at giant gas producer Gazprom (OTCPK:OGZPY), which is trading at a price-to-earnings ratio of 5 as I write.

(click to enlarge) source: StockCharts.com


Latest earnings

In Gazprom's latest quarter net profit soared to 293.8 billion rubles, or $4.75 billion, a year-over-year gain of 29 percent. The major catalyst there was the ruble, which has been under extreme pressure from falling oil prices.

In the first half earnings climbed over 675 billion rubles, which represented an annual growth rate of 50 percent. That remains on target, and could surpass it based upon its most recent quarterly performance.

For the first time in 10 quarters, free cash flow came in negative, with revenue dropping by 3.8 percent.

Lower revenue doesn't bother me with Russia's currency dictating the earnings of Gazprom. If oil and gas revenue go up, and the ruble does as well, the profit narrative for Gazprom will continue on.

We may see lower oil and gas prices, but where Gazprom stands right now, it's still a good value play for those with a long-term investing horizon.

Ruble

Even though commodities have been taking a beating for some time, the demand part of the equation isn't the only factor in determining the profitability of natural resource companies.

One element included in the mix is the value of the currency of a respective nation a company is based in, which will determine the results at the bottom line when the currency has fallen.

That has been the case with Gazprom, which has been doing very well for that reason alone.

Recent U.S. crude inventories data reveal stockpiles were climbing at a higher rate than expected, which mean oil prices, which directly have an impact on the value of the ruble, will keep downward pressure on the currency. That's good news for Gazprom and other Russian companies exporting commodities.

For those not familiar with the impact of currencies on exports, with Russia companies pay the majority of their costs with rubles, but generates most sales or revenue in the U.S. dollar or the euro. The difference between the two is what has been driving Gazprom's solid performance, and Russia's overall economic growth in 2015.

Under these conditions, Gazprom is hard to compete against internationally, and will continue to be for some time.

Another earnings and growth catalyst has been the cut in export duties in January, 2015, which has aided Gazprom in its profitability as well.

The general point is there are ways for an energy company to generate solid earnings in a low-demand, low-price market.

European business

At this time approximately 56 present of Gazprom's sales come from Europe, with gas sales jumping to about RUB 946 billion, or $9 billion, in the last quarter.

The importance of that is even with all the geopolitical talk and negative press Russia has received, as it relates to Gazprom and its European business, it hasn't had much, if any, effect. Unless something major happens to change the scenario, that will continue. I wouldn't look for any negative from Europe over the next several years, barring an unforeseen crisis.

Gazprom said Europe was the major catalyst for sales growth in the first half. The EU gets approximately 20 percent of its natural gas from Russia.

There are rumblings of EU countries searching for new natural gas imports, with Azerbaijan getting the call for more business. Anticipating some lost business over time, Gazprom has responded by looking to Asia to open up new markets.

All of that is bantered around in the media as if it's something that will happen in the near future. At earliest, it's likely to take a minimum of four years, or longer, for that to have material impact on Gazprom.

Gas prices in Germany, the largest individual market of Gazprom, have been falling, and expectations are that will be the case in the overall EU as well over the next 12 months.

As long as the ruble remains weak, that won't cut into earnings.

The bottom line for year is investors need to ignore the headlines concerning political issues. That won't have any impact on Gazprom unless something escalates.

China pipeline

In 2014, Putin and China reached an agreement on a $400 billion deal to supply gas to the Middle Kingdom from east Siberia. That was the first major move Russia made in response to sanctions and potential long-term shrinkage of its Western markets.

Gazprom is now working on a deal to supply gas from its fields in west Siberia, which would land the company another 30-year contract if things go according to plan.

All of that gas will need a pipeline, with a couple of different options now on the table. Originally Russia was looking to supply China from its western fields, but now it looks like China would be more amiable to a pipeline coming from the east.

In the near future Gazprom will sign a memorandum of understanding with China concerning the pipeline from the east. The western Siberian deal is "unlikely" to have a signed contract at the same time. That will engaged in separately.

The combination of the two deals would bring the total cubic meters of gas delivered annually by Gazprom to China to about 68 billion.

Conclusion

Gazprom is undervalued primarily because of the weak ruble, which because the bulk of its costs come from the domestic sector, it generates strong earnings because of its sales being transacted in the U.S. dollar and euro.

Its largest market Europe, will continue to be so for at least several years, with nothing less than a major crisis changing that outlook.

China is poised to become its biggest gas trading partner, which over time will produce a significant increase in revenue and earnings.

Add to that the fact when gas and oil prices rise, the ruble will rise with them, which means margins and earnings should remain fairly level. That could change if the ruble rallies strongly, which would at that time put some pressure on earnings. I don't see that happening anytime soon.

Trading at a P/E of about 5 makes Gazprom an extremely undervalued company in light of the fact it keeps churning out strong earnings.

Right now is a good entry point, but if there is further erosion of the ruble, it will get even better. Either way this is a good value play.

http://seekingalpha.com/article/3488916 ... play?ifp=0

[Lady-baron]

Hated Russia And Gazprom A Great Value Play

Sep. 3, 2015 4:08 PM ET | About: Gazprom OAO ADR (OGZPY)

Russia growth for the year up almost 15 percent.
Gazprom is a great value play, as it continues to throw off strong earnings.
The ruble and lower export taxes are the main catalysts behind its performance.
Even though Russia has been reportedly pressured from the plunge in oil prices and economic sanctions from some countries, it has in fact held up well, up approximately 15 percent so far in 2015, making it among the best economic performers of the year.

Based upon long-term Cyclically Adjusted Price Earnings, it is now the second-cheapest market in the world at this time. It's now trading at a P/E of close to 4.8, and has a price-to-book ratio of 0.7.

When compared with the MSCI Emerging Markets Index, it trades at approximately half that level, moving it into a value play for investors willing to hold for the longer term.

With Russia hated and inexpensive, it's definitely time to take a closer look.

As a major Russian play we'll look at giant gas producer Gazprom (OTCPK:OGZPY), which is trading at a price-to-earnings ratio of 5 as I write.

(click to enlarge) source: StockCharts.com


Latest earnings

In Gazprom's latest quarter net profit soared to 293.8 billion rubles, or $4.75 billion, a year-over-year gain of 29 percent. The major catalyst there was the ruble, which has been under extreme pressure from falling oil prices.

In the first half earnings climbed over 675 billion rubles, which represented an annual growth rate of 50 percent. That remains on target, and could surpass it based upon its most recent quarterly performance.

For the first time in 10 quarters, free cash flow came in negative, with revenue dropping by 3.8 percent.

Lower revenue doesn't bother me with Russia's currency dictating the earnings of Gazprom. If oil and gas revenue go up, and the ruble does as well, the profit narrative for Gazprom will continue on.

We may see lower oil and gas prices, but where Gazprom stands right now, it's still a good value play for those with a long-term investing horizon.

Ruble

Even though commodities have been taking a beating for some time, the demand part of the equation isn't the only factor in determining the profitability of natural resource companies.

One element included in the mix is the value of the currency of a respective nation a company is based in, which will determine the results at the bottom line when the currency has fallen.

That has been the case with Gazprom, which has been doing very well for that reason alone.

Recent U.S. crude inventories data reveal stockpiles were climbing at a higher rate than expected, which mean oil prices, which directly have an impact on the value of the ruble, will keep downward pressure on the currency. That's good news for Gazprom and other Russian companies exporting commodities.

For those not familiar with the impact of currencies on exports, with Russia companies pay the majority of their costs with rubles, but generates most sales or revenue in the U.S. dollar or the euro. The difference between the two is what has been driving Gazprom's solid performance, and Russia's overall economic growth in 2015.

Under these conditions, Gazprom is hard to compete against internationally, and will continue to be for some time.

Another earnings and growth catalyst has been the cut in export duties in January, 2015, which has aided Gazprom in its profitability as well.

The general point is there are ways for an energy company to generate solid earnings in a low-demand, low-price market.

European business

At this time approximately 56 present of Gazprom's sales come from Europe, with gas sales jumping to about RUB 946 billion, or $9 billion, in the last quarter.

The importance of that is even with all the geopolitical talk and negative press Russia has received, as it relates to Gazprom and its European business, it hasn't had much, if any, effect. Unless something major happens to change the scenario, that will continue. I wouldn't look for any negative from Europe over the next several years, barring an unforeseen crisis.

Gazprom said Europe was the major catalyst for sales growth in the first half. The EU gets approximately 20 percent of its natural gas from Russia.

There are rumblings of EU countries searching for new natural gas imports, with Azerbaijan getting the call for more business. Anticipating some lost business over time, Gazprom has responded by looking to Asia to open up new markets.

All of that is bantered around in the media as if it's something that will happen in the near future. At earliest, it's likely to take a minimum of four years, or longer, for that to have material impact on Gazprom.

Gas prices in Germany, the largest individual market of Gazprom, have been falling, and expectations are that will be the case in the overall EU as well over the next 12 months.

As long as the ruble remains weak, that won't cut into earnings.

The bottom line for year is investors need to ignore the headlines concerning political issues. That won't have any impact on Gazprom unless something escalates.

China pipeline

In 2014, Putin and China reached an agreement on a $400 billion deal to supply gas to the Middle Kingdom from east Siberia. That was the first major move Russia made in response to sanctions and potential long-term shrinkage of its Western markets.

Gazprom is now working on a deal to supply gas from its fields in west Siberia, which would land the company another 30-year contract if things go according to plan.

All of that gas will need a pipeline, with a couple of different options now on the table. Originally Russia was looking to supply China from its western fields, but now it looks like China would be more amiable to a pipeline coming from the east.

In the near future Gazprom will sign a memorandum of understanding with China concerning the pipeline from the east. The western Siberian deal is "unlikely" to have a signed contract at the same time. That will engaged in separately.

The combination of the two deals would bring the total cubic meters of gas delivered annually by Gazprom to China to about 68 billion.

Conclusion

Gazprom is undervalued primarily because of the weak ruble, which because the bulk of its costs come from the domestic sector, it generates strong earnings because of its sales being transacted in the U.S. dollar and euro.

Its largest market Europe, will continue to be so for at least several years, with nothing less than a major crisis changing that outlook.

China is poised to become its biggest gas trading partner, which over time will produce a significant increase in revenue and earnings.

Add to that the fact when gas and oil prices rise, the ruble will rise with them, which means margins and earnings should remain fairly level. That could change if the ruble rallies strongly, which would at that time put some pressure on earnings. I don't see that happening anytime soon.

Trading at a P/E of about 5 makes Gazprom an extremely undervalued company in light of the fact it keeps churning out strong earnings.

Right now is a good entry point, but if there is further erosion of the ruble, it will get even better. Either way this is a good value play.

http://seekingalpha.com/article/3488916 ... play?ifp=0

[Lady-baron]

Hated Russia And Gazprom A Great Value Play

Sep. 3, 2015 4:08 PM ET | About: Gazprom OAO ADR (OGZPY)

Russia growth for the year up almost 15 percent.
Gazprom is a great value play, as it continues to throw off strong earnings.
The ruble and lower export taxes are the main catalysts behind its performance.
Even though Russia has been reportedly pressured from the plunge in oil prices and economic sanctions from some countries, it has in fact held up well, up approximately 15 percent so far in 2015, making it among the best economic performers of the year.

Based upon long-term Cyclically Adjusted Price Earnings, it is now the second-cheapest market in the world at this time. It's now trading at a P/E of close to 4.8, and has a price-to-book ratio of 0.7.

When compared with the MSCI Emerging Markets Index, it trades at approximately half that level, moving it into a value play for investors willing to hold for the longer term.

With Russia hated and inexpensive, it's definitely time to take a closer look.

As a major Russian play we'll look at giant gas producer Gazprom (OTCPK:OGZPY), which is trading at a price-to-earnings ratio of 5 as I write.

(click to enlarge) source: StockCharts.com


Latest earnings

In Gazprom's latest quarter net profit soared to 293.8 billion rubles, or $4.75 billion, a year-over-year gain of 29 percent. The major catalyst there was the ruble, which has been under extreme pressure from falling oil prices.

In the first half earnings climbed over 675 billion rubles, which represented an annual growth rate of 50 percent. That remains on target, and could surpass it based upon its most recent quarterly performance.

For the first time in 10 quarters, free cash flow came in negative, with revenue dropping by 3.8 percent.

Lower revenue doesn't bother me with Russia's currency dictating the earnings of Gazprom. If oil and gas revenue go up, and the ruble does as well, the profit narrative for Gazprom will continue on.

We may see lower oil and gas prices, but where Gazprom stands right now, it's still a good value play for those with a long-term investing horizon.

Ruble

Even though commodities have been taking a beating for some time, the demand part of the equation isn't the only factor in determining the profitability of natural resource companies.

One element included in the mix is the value of the currency of a respective nation a company is based in, which will determine the results at the bottom line when the currency has fallen.

That has been the case with Gazprom, which has been doing very well for that reason alone.

Recent U.S. crude inventories data reveal stockpiles were climbing at a higher rate than expected, which mean oil prices, which directly have an impact on the value of the ruble, will keep downward pressure on the currency. That's good news for Gazprom and other Russian companies exporting commodities.

For those not familiar with the impact of currencies on exports, with Russia companies pay the majority of their costs with rubles, but generates most sales or revenue in the U.S. dollar or the euro. The difference between the two is what has been driving Gazprom's solid performance, and Russia's overall economic growth in 2015.

Under these conditions, Gazprom is hard to compete against internationally, and will continue to be for some time.

Another earnings and growth catalyst has been the cut in export duties in January, 2015, which has aided Gazprom in its profitability as well.

The general point is there are ways for an energy company to generate solid earnings in a low-demand, low-price market.

European business

At this time approximately 56 present of Gazprom's sales come from Europe, with gas sales jumping to about RUB 946 billion, or $9 billion, in the last quarter.

The importance of that is even with all the geopolitical talk and negative press Russia has received, as it relates to Gazprom and its European business, it hasn't had much, if any, effect. Unless something major happens to change the scenario, that will continue. I wouldn't look for any negative from Europe over the next several years, barring an unforeseen crisis.

Gazprom said Europe was the major catalyst for sales growth in the first half. The EU gets approximately 20 percent of its natural gas from Russia.

There are rumblings of EU countries searching for new natural gas imports, with Azerbaijan getting the call for more business. Anticipating some lost business over time, Gazprom has responded by looking to Asia to open up new markets.

All of that is bantered around in the media as if it's something that will happen in the near future. At earliest, it's likely to take a minimum of four years, or longer, for that to have material impact on Gazprom.

Gas prices in Germany, the largest individual market of Gazprom, have been falling, and expectations are that will be the case in the overall EU as well over the next 12 months.

As long as the ruble remains weak, that won't cut into earnings.

The bottom line for year is investors need to ignore the headlines concerning political issues. That won't have any impact on Gazprom unless something escalates.

China pipeline

In 2014, Putin and China reached an agreement on a $400 billion deal to supply gas to the Middle Kingdom from east Siberia. That was the first major move Russia made in response to sanctions and potential long-term shrinkage of its Western markets.

Gazprom is now working on a deal to supply gas from its fields in west Siberia, which would land the company another 30-year contract if things go according to plan.

All of that gas will need a pipeline, with a couple of different options now on the table. Originally Russia was looking to supply China from its western fields, but now it looks like China would be more amiable to a pipeline coming from the east.

In the near future Gazprom will sign a memorandum of understanding with China concerning the pipeline from the east. The western Siberian deal is "unlikely" to have a signed contract at the same time. That will engaged in separately.

The combination of the two deals would bring the total cubic meters of gas delivered annually by Gazprom to China to about 68 billion.

Conclusion

Gazprom is undervalued primarily because of the weak ruble, which because the bulk of its costs come from the domestic sector, it generates strong earnings because of its sales being transacted in the U.S. dollar and euro.

Its largest market Europe, will continue to be so for at least several years, with nothing less than a major crisis changing that outlook.

China is poised to become its biggest gas trading partner, which over time will produce a significant increase in revenue and earnings.

Add to that the fact when gas and oil prices rise, the ruble will rise with them, which means margins and earnings should remain fairly level. That could change if the ruble rallies strongly, which would at that time put some pressure on earnings. I don't see that happening anytime soon.

Trading at a P/E of about 5 makes Gazprom an extremely undervalued company in light of the fact it keeps churning out strong earnings.

Right now is a good entry point, but if there is further erosion of the ruble, it will get even better. Either way this is a good value play.

http://seekingalpha.com/article/3488916 ... play?ifp=0

[Lady-baron]

Hated Russia And Gazprom A Great Value Play

Sep. 3, 2015 4:08 PM ET | About: Gazprom OAO ADR (OGZPY)

Russia growth for the year up almost 15 percent.
Gazprom is a great value play, as it continues to throw off strong earnings.
The ruble and lower export taxes are the main catalysts behind its performance.
Even though Russia has been reportedly pressured from the plunge in oil prices and economic sanctions from some countries, it has in fact held up well, up approximately 15 percent so far in 2015, making it among the best economic performers of the year.

Based upon long-term Cyclically Adjusted Price Earnings, it is now the second-cheapest market in the world at this time. It's now trading at a P/E of close to 4.8, and has a price-to-book ratio of 0.7.

When compared with the MSCI Emerging Markets Index, it trades at approximately half that level, moving it into a value play for investors willing to hold for the longer term.

With Russia hated and inexpensive, it's definitely time to take a closer look.

As a major Russian play we'll look at giant gas producer Gazprom (OTCPK:OGZPY), which is trading at a price-to-earnings ratio of 5 as I write.

(click to enlarge) source: StockCharts.com


Latest earnings

In Gazprom's latest quarter net profit soared to 293.8 billion rubles, or $4.75 billion, a year-over-year gain of 29 percent. The major catalyst there was the ruble, which has been under extreme pressure from falling oil prices.

In the first half earnings climbed over 675 billion rubles, which represented an annual growth rate of 50 percent. That remains on target, and could surpass it based upon its most recent quarterly performance.

For the first time in 10 quarters, free cash flow came in negative, with revenue dropping by 3.8 percent.

Lower revenue doesn't bother me with Russia's currency dictating the earnings of Gazprom. If oil and gas revenue go up, and the ruble does as well, the profit narrative for Gazprom will continue on.

We may see lower oil and gas prices, but where Gazprom stands right now, it's still a good value play for those with a long-term investing horizon.

Ruble

Even though commodities have been taking a beating for some time, the demand part of the equation isn't the only factor in determining the profitability of natural resource companies.

One element included in the mix is the value of the currency of a respective nation a company is based in, which will determine the results at the bottom line when the currency has fallen.

That has been the case with Gazprom, which has been doing very well for that reason alone.

Recent U.S. crude inventories data reveal stockpiles were climbing at a higher rate than expected, which mean oil prices, which directly have an impact on the value of the ruble, will keep downward pressure on the currency. That's good news for Gazprom and other Russian companies exporting commodities.

For those not familiar with the impact of currencies on exports, with Russia companies pay the majority of their costs with rubles, but generates most sales or revenue in the U.S. dollar or the euro. The difference between the two is what has been driving Gazprom's solid performance, and Russia's overall economic growth in 2015.

Under these conditions, Gazprom is hard to compete against internationally, and will continue to be for some time.

Another earnings and growth catalyst has been the cut in export duties in January, 2015, which has aided Gazprom in its profitability as well.

The general point is there are ways for an energy company to generate solid earnings in a low-demand, low-price market.

European business

At this time approximately 56 present of Gazprom's sales come from Europe, with gas sales jumping to about RUB 946 billion, or $9 billion, in the last quarter.

The importance of that is even with all the geopolitical talk and negative press Russia has received, as it relates to Gazprom and its European business, it hasn't had much, if any, effect. Unless something major happens to change the scenario, that will continue. I wouldn't look for any negative from Europe over the next several years, barring an unforeseen crisis.

Gazprom said Europe was the major catalyst for sales growth in the first half. The EU gets approximately 20 percent of its natural gas from Russia.

There are rumblings of EU countries searching for new natural gas imports, with Azerbaijan getting the call for more business. Anticipating some lost business over time, Gazprom has responded by looking to Asia to open up new markets.

All of that is bantered around in the media as if it's something that will happen in the near future. At earliest, it's likely to take a minimum of four years, or longer, for that to have material impact on Gazprom.

Gas prices in Germany, the largest individual market of Gazprom, have been falling, and expectations are that will be the case in the overall EU as well over the next 12 months.

As long as the ruble remains weak, that won't cut into earnings.

The bottom line for year is investors need to ignore the headlines concerning political issues. That won't have any impact on Gazprom unless something escalates.

China pipeline

In 2014, Putin and China reached an agreement on a $400 billion deal to supply gas to the Middle Kingdom from east Siberia. That was the first major move Russia made in response to sanctions and potential long-term shrinkage of its Western markets.

Gazprom is now working on a deal to supply gas from its fields in west Siberia, which would land the company another 30-year contract if things go according to plan.

All of that gas will need a pipeline, with a couple of different options now on the table. Originally Russia was looking to supply China from its western fields, but now it looks like China would be more amiable to a pipeline coming from the east.

In the near future Gazprom will sign a memorandum of understanding with China concerning the pipeline from the east. The western Siberian deal is "unlikely" to have a signed contract at the same time. That will engaged in separately.

The combination of the two deals would bring the total cubic meters of gas delivered annually by Gazprom to China to about 68 billion.

Conclusion

Gazprom is undervalued primarily because of the weak ruble, which because the bulk of its costs come from the domestic sector, it generates strong earnings because of its sales being transacted in the U.S. dollar and euro.

Its largest market Europe, will continue to be so for at least several years, with nothing less than a major crisis changing that outlook.

China is poised to become its biggest gas trading partner, which over time will produce a significant increase in revenue and earnings.

Add to that the fact when gas and oil prices rise, the ruble will rise with them, which means margins and earnings should remain fairly level. That could change if the ruble rallies strongly, which would at that time put some pressure on earnings. I don't see that happening anytime soon.

Trading at a P/E of about 5 makes Gazprom an extremely undervalued company in light of the fact it keeps churning out strong earnings.

Right now is a good entry point, but if there is further erosion of the ruble, it will get even better. Either way this is a good value play.

http://seekingalpha.com/article/3488916 ... play?ifp=0

[Lady-baron]

Hated Russia And Gazprom A Great Value Play

Sep. 3, 2015 4:08 PM ET | About: Gazprom OAO ADR (OGZPY)

Russia growth for the year up almost 15 percent.
Gazprom is a great value play, as it continues to throw off strong earnings.
The ruble and lower export taxes are the main catalysts behind its performance.
Even though Russia has been reportedly pressured from the plunge in oil prices and economic sanctions from some countries, it has in fact held up well, up approximately 15 percent so far in 2015, making it among the best economic performers of the year.

Based upon long-term Cyclically Adjusted Price Earnings, it is now the second-cheapest market in the world at this time. It's now trading at a P/E of close to 4.8, and has a price-to-book ratio of 0.7.

When compared with the MSCI Emerging Markets Index, it trades at approximately half that level, moving it into a value play for investors willing to hold for the longer term.

With Russia hated and inexpensive, it's definitely time to take a closer look.

As a major Russian play we'll look at giant gas producer Gazprom (OTCPK:OGZPY), which is trading at a price-to-earnings ratio of 5 as I write.

(click to enlarge) source: StockCharts.com


Latest earnings

In Gazprom's latest quarter net profit soared to 293.8 billion rubles, or $4.75 billion, a year-over-year gain of 29 percent. The major catalyst there was the ruble, which has been under extreme pressure from falling oil prices.

In the first half earnings climbed over 675 billion rubles, which represented an annual growth rate of 50 percent. That remains on target, and could surpass it based upon its most recent quarterly performance.

For the first time in 10 quarters, free cash flow came in negative, with revenue dropping by 3.8 percent.

Lower revenue doesn't bother me with Russia's currency dictating the earnings of Gazprom. If oil and gas revenue go up, and the ruble does as well, the profit narrative for Gazprom will continue on.

We may see lower oil and gas prices, but where Gazprom stands right now, it's still a good value play for those with a long-term investing horizon.

Ruble

Even though commodities have been taking a beating for some time, the demand part of the equation isn't the only factor in determining the profitability of natural resource companies.

One element included in the mix is the value of the currency of a respective nation a company is based in, which will determine the results at the bottom line when the currency has fallen.

That has been the case with Gazprom, which has been doing very well for that reason alone.

Recent U.S. crude inventories data reveal stockpiles were climbing at a higher rate than expected, which mean oil prices, which directly have an impact on the value of the ruble, will keep downward pressure on the currency. That's good news for Gazprom and other Russian companies exporting commodities.

For those not familiar with the impact of currencies on exports, with Russia companies pay the majority of their costs with rubles, but generates most sales or revenue in the U.S. dollar or the euro. The difference between the two is what has been driving Gazprom's solid performance, and Russia's overall economic growth in 2015.

Under these conditions, Gazprom is hard to compete against internationally, and will continue to be for some time.

Another earnings and growth catalyst has been the cut in export duties in January, 2015, which has aided Gazprom in its profitability as well.

The general point is there are ways for an energy company to generate solid earnings in a low-demand, low-price market.

European business

At this time approximately 56 present of Gazprom's sales come from Europe, with gas sales jumping to about RUB 946 billion, or $9 billion, in the last quarter.

The importance of that is even with all the geopolitical talk and negative press Russia has received, as it relates to Gazprom and its European business, it hasn't had much, if any, effect. Unless something major happens to change the scenario, that will continue. I wouldn't look for any negative from Europe over the next several years, barring an unforeseen crisis.

Gazprom said Europe was the major catalyst for sales growth in the first half. The EU gets approximately 20 percent of its natural gas from Russia.

There are rumblings of EU countries searching for new natural gas imports, with Azerbaijan getting the call for more business. Anticipating some lost business over time, Gazprom has responded by looking to Asia to open up new markets.

All of that is bantered around in the media as if it's something that will happen in the near future. At earliest, it's likely to take a minimum of four years, or longer, for that to have material impact on Gazprom.

Gas prices in Germany, the largest individual market of Gazprom, have been falling, and expectations are that will be the case in the overall EU as well over the next 12 months.

As long as the ruble remains weak, that won't cut into earnings.

The bottom line for year is investors need to ignore the headlines concerning political issues. That won't have any impact on Gazprom unless something escalates.

China pipeline

In 2014, Putin and China reached an agreement on a $400 billion deal to supply gas to the Middle Kingdom from east Siberia. That was the first major move Russia made in response to sanctions and potential long-term shrinkage of its Western markets.

Gazprom is now working on a deal to supply gas from its fields in west Siberia, which would land the company another 30-year contract if things go according to plan.

All of that gas will need a pipeline, with a couple of different options now on the table. Originally Russia was looking to supply China from its western fields, but now it looks like China would be more amiable to a pipeline coming from the east.

In the near future Gazprom will sign a memorandum of understanding with China concerning the pipeline from the east. The western Siberian deal is "unlikely" to have a signed contract at the same time. That will engaged in separately.

The combination of the two deals would bring the total cubic meters of gas delivered annually by Gazprom to China to about 68 billion.

Conclusion

Gazprom is undervalued primarily because of the weak ruble, which because the bulk of its costs come from the domestic sector, it generates strong earnings because of its sales being transacted in the U.S. dollar and euro.

Its largest market Europe, will continue to be so for at least several years, with nothing less than a major crisis changing that outlook.

China is poised to become its biggest gas trading partner, which over time will produce a significant increase in revenue and earnings.

Add to that the fact when gas and oil prices rise, the ruble will rise with them, which means margins and earnings should remain fairly level. That could change if the ruble rallies strongly, which would at that time put some pressure on earnings. I don't see that happening anytime soon.

Trading at a P/E of about 5 makes Gazprom an extremely undervalued company in light of the fact it keeps churning out strong earnings.

Right now is a good entry point, but if there is further erosion of the ruble, it will get even better. Either way this is a good value play.

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