In Europe, the strong recovery of economic activities is causing an alarming shortage in gas supply. With natural gas stores now 75% below the 10-year average, there is the risk of running out completely if this year's winter is too cold.
Thus, gas prices soared to new highs on Wednesday, surpassing 160 euros (about $185) per megawatt-hour (MWh), prompting a Europe-wide summit scheduled for late October in which the leaders of the 27 members of the EU will try to find a solution for the energy crisis. The leaders will discuss a gas reform that considers priorities such as mitigating social impacts while protecting the most vulnerable households from gas price volatility and supply setbacks.
For the short run, the solution is to buy more gas from Russia, the largest supplier in Europe, through the multinational energy company Gazprom PJSC â‚˝ (MIC:GAZP, Financial) of which Russia is also the major shareholder.
Russian President Vladmir Putin said yesterday that Russia is ready to send more gas to Europe through Ukrainian pipelines. Any additional supply of gas from Russia, however, will likely be set at a higher price than contracted already for this year due to being bought on the spot market rather than via contracts, which is going to be beneficial for Gazprom in the upcoming months.
Thus, I believe that purchasing shares of the Russian gas giant make sense for investors who are seeking short-term investment opportunities in the energy sector. Here they can capitalize on strong short-term tailwinds which are not uncommon in the extremely volatile gas market.
In the earnings conference call for the first six months of 2021, Gazprom's finance chief Alexander Ivannikov said to investors that results for the second part of 2021 will exceed those in the first part of the year. Now, with gas prices breaking through the supportable price limit in Europe, there are even more chances that the financial statement will look much better than the company projected a few months ago.
Analysts estimate that Gazprom's revenue will come in at $124.26 billion in full year 2021 and $138.39 billion in 2022 which, compared to approximately $107 billion in trailing 12-month revenues as of June 30, represents outstanding growth.
Operations are expected to produce a higher 12-month Ebitda of $32.32 billion in 2021 and $37.443 billion for the subsequent year, compared to $31.42 billion as of the first half of 2021.
The 12-month EPS is also projected to increase to $1.50 in 2021 and $1.81 in 2022 versus $0.15 recorded for the full year of fiscal 2020.
If Gazprom's results improve as expected, the stock price may receive a significant boost. In fact, Wall Street recommends a buy rating for the stock.
On the Moscow Exchange, the share price was 371.75 Russian Roubles ($5.13) at close on Wednesday for a market cap of approximately $121.3 billion.
Following a 75% year-to-date rise, the stock doesn't seem cheap as the share price is well above the 50-day moving average value of $4.53, but considering the growth potential, I still believe the stock is undervalued.
Gazprom currently explores and produces gas that it sells to Europe and many countries in Asia. Its supply can satisfy 15% of the global need for natural gas. In Russia, the company also engages in the transmission of gas and is operating underground facilities for the storage of gas. Gazprom also produces and sells oil and gas condensate as well as electric and heat energy.
The company has a robust balance sheet as indicated by $21.5 billion in cash on hand and short-term investments, a moderate debt-equity ratio of 33.90% and a current ratio of 1.5. The interest coverage ratio of 19.8 tells that the company doesn’t have any problem paying the interest expenses on the outstanding debt.
The stock grants a forward dividend yield of 3.25%. It is possible to invest in the company through the U.S. over the counter market where Public Joint Stock Company Gazprom (OGZPY, Financial) offers a 3.15% yield, while Public Joint Stock Company Gazprom Neft (GZPFY, Financial) offers a 2.75% yield as of the writing of this article. Investors will also need to account for how the U.S. dollar exchanges with the Russian Rouble currency, which could affect profits.
Disclosure: I have no positions in any securities mentioned in this article.
