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Like a moth to a flame, I’m drawn to turmoil and uncertainty. It’s only in these situations that the deepest values emerge. They never emerge in situations where everyone is blissful and content.
Russia remains a cauldron of turmoil and uncertainty, and this fact is reflected in the price of Russian stocks. Many are priced at multiples as if oblivion lies just over the horizon. How else do you explain pricing one of the world’s largest energy companies to trade at less than two times trailing 12-month EPS, less than 24% of annual revenue, less than 15% of book value?
Good luck finding a U.S.-based energy company trading with such low multiples. You’ll need even more luck to find a U.S.-based energy company trading with such low multiples that sports a 5.5% dividend yield.
Russia’s Gazprom PAO (OTC: OGZPY) is the cheap energy company with the low multiples and the rich 5.5% dividend yield.
Gazprom is an Energy Behemoth
Gazprom is large in every measure: Total assets exceed $268 billion, trailing 12-month revenue exceeds $198 billion and the market cap exceeds $49 billion. Gazprom owns the world’s largest gas transmission system, with a total length of 106,000 miles.
The numbers are big because everything about Russia’s energy production is big. Russia is by far the world leader in natural gas reserves; it’s not even close.
Russia has 1,688 trillion cubic feet of proven reserves. To get an idea of the magnitude of 1,688 trillion cubic feet, the U.S. Geological Survey (USGS) estimates that two of the larger U.S. shale formations, Marcellus (mostly in Pennsylvania) and Bakkan (North Dakota), could “technically” produce 84 trillion and 6.7 trillion cubic feet of natural gas, respectively.
The majority of Russia’s natural-gas reserves are located in Siberia, with the Yamburg, Urengoy, and Medvezh’ye fields accounting for more than 40% (675 trillion cubic feet) of Russia’s total reserves. Gazprom holds licenses accounting for 60% of these reserves. Last year, Gazprom alone accounted for 11% of the world’s natural gas supply.
Russia is the go-to natural-gas source for Western Europe. It supplies the European Union with 30% of its natural-gas needs. Gazprom has a monopoly on Russian pipeline gas exports to Europe, which earned it $38 billion last year. Gazprom’s analysis shows that exports to Europe will be more than 5.8 trillion cubic feet this year, about 4% more than in 2015. It will stay above 5.8 trillion cubic feet for at least the next three years.
But Gazprom doesn’t just supply the West with natural gas. To the East, Gazprom and China National Petroleum Corp. signed a 30-year agreement two years ago for natural gas worth an estimated $400 billion. The deal has Gazprom supplying 125 billion cubic feet of gas to China each year for 30 years beginning after 2018. The deal will increase Gazprom’s natural gas production roughly 8% annually.
So, yes, Gazprom is big, but size alone won’t deter detractors.
Gazprom’s latest quarterly earnings left investors flat. Quarterly earnings fell 5% year over year to $5.6 billion. This is despite a 5% gain in quarterly revenue. A 24% increase in operating expenses, caused mostly by an increase in expenses relating to an asset swap agreement between Gazprom and Germany’s Wintershall, was the cause of the earnings shortfall.
Gazprom’s 5.5% Yield
As for future earnings, low natural gas prices will make it difficult for Gazprom to grow them. Though Gazprom is mostly about natural gas, lower global oil prices also weigh on financial results. Many of Gazprom’s gas contracts are linked to crude-oil prices. Low crude prices will continue to crimp Gazprom’s revenue growth.
Of course, political risk is always prevalent when investing in a Russian company. Political uncertainty (as to Russia’s intentions toward Europe and as to the United States’ intentions toward Russia) has induced many European countries to seek other natural-gas sources. Some already have. A few European countries are now able to buy gas at lower spot prices and that undermines Gazprom’s preferred model of long-term contracts.
But as I said, bliss and contentment fail to produce deep-value investments. Gazprom is one of the deepest values on the market. Admittedly, it may take a while for it to become less value-priced. But you do have one consolation in the meantime: Gazprom’s 5.5% dividend yield. (For more hefty yields like this, click here.)