PJSC Gazprom (OGZPY, Financial) is a Russian E&P company. The Russian government has a majority stake of just over 50%.
Gazprom is the single largest natural gas producer in the world. It supplies nearly 40% of European demand and 13% of Chinese demand. The company also owns 170,000+ kilometers of pipelines such as the Nord Stream networks and the Power of Siberia, as well as LNG operations. Its entire asset base is very well positioned going into the age of energy transition in the next fifty years.
Valuation
The reason I’m very attracted to Gazprom is twofold. First of all, the company owns 17% of all current global gas reserves. Natural gas is a relatively clean-burning fossil fuel, which makes this type of reserve even more valuable compared to liquids. For reference, Saudi Arabia has about 18% of global oil reserves. Gazprom has a similar stronghold on gas. The company is also responsible for 13% of global production, and that’s quite a bit below its share in reserves. The slide below is from the company's 2019 presentation to investors:
Please note that in the short term I’m not a believer in huge growth here. By 2026, the company will potentially have increased its output by 30% at most. Gas prices could do a lot for the company, but I’m assuming stability there in order to avoid overoptimism.
The company is trading at 3.4 times cash flow, with a price-earnings ratio of 3.9 and an EV-EBITDA ratio of 3.9. Even for a company with little or no growth and depleting assets, that is incredibly cheap.
It is also trading at a 6% dividend yield and guiding to increase its payout ratio to 50%. The dividend on a cost-base of today could rise to 12% over the next few years. That is very attractive to me because it serves as a catalyst to solve the low valuation. It also decreases the risk that I will discuss next, as every year that one is allowed to own Gazprom it throws off cash.
Risk
The risk here is mainly political in nature. Russia isn’t known for stability and respect for private property. There is always a risk as a foreign investor of your economic interest being pressured.
Because Russia plays a role in international politic,s there is also the risk of sanctions by the U.S. or Europe as retaliation for a political perceived transgression, which might affect or even hurt Gazprom. Sanctions can be devastating on some businesses.
Outlook
There are basically four reasons why I believe Gazprom is very attractive:
1) The company is trading at rock bottom valuation if you consider its reserves and operating cash flow / EBITDA / earnings metrics.
2) The company is going to grow a bit despite trading at no-growth multiples, even without gas prices rocketing up.
3) The company is very well-positioned against the backdrop of the energy transition that will take place over the next decades, as it is burning a fuel that is relatively clean.
4) The biggest risk is confiscatory or political in nature, but this is mitigated to an extent by the low valuation, enabling a very high dividend yield. The dividend is set to increase in the next few years from 6% to 12% of the current cost base.
Disclosure: author is long Gazprom
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