Russian stocks are extremely cheap right now. You can buy Russian stocks today at 1997 prices. It’s as if the Russian market has had two lost decades! Whilst there are reasons for investors shunning the Russian market, such as sanctions imposed by the western world, there is no reason for it to be trading at a price-to-earnings (P/E) ratio of just seven. This is true for even the bluest of blue chip stocks, like Gazprom for example, and this can be a great buying opportunity for individual investors who have a long time horizon.
Gazprom (GAZ) is an energy giant. It holds the world’s largest natural gas reserves and currently produces over 11% of the worlds natural gas. It even owns the the world’s largest gas transmission system with a total length of 171.2 thousand kilometers which allows it to export the gas is produces to far reaching places. Apart from gas, Gazprom is also big in oil. It is among Russia’s top four oil producers. In addition to this, Gazprom ranks number one in the world in terms of thermal energy generation.
What has made Gazprom come under my radar is that its shares are so cheap at the moment. There are reasons for this which I will discuss below but I do believe that the market has overreacted.
The price of Gazprom stock has fallen over the past couple of years. This is due to a number of factors such as :
- The crash in the price of oil and natural gas – This is the primary reason for the fall in the share price over the past 2 years. As the price of oil and gas has declined over the past two years, so has the companies revenue and profit stream.
- Sanctions imposed on Russian companies – It is no secret that the west and Russia have locked horns with each other. This lead to the US imposing sanctions on Russian companies and Gazprom has been hit as a result of this.
- Too much politicking by Russia – Gazprom is so intertwined with the Kremlin that it is sometimes hard to distinguish one from another. Investor don’t like the fact that Gazprom can be used as a political tool by the Russian Government to further its cause. As renowned investor Jim Grant sates ‘Gazprom is by acclimation the world’s worst company managed by the worst kleptocrats ever assembled on one continent.’
Gazprom has the tendency to consistently obliterate shareholder value on expensive projects, which do not yield attractive returns. Some of the projects which they take on is for political, rather than economic reasons. One reason for this is that the Russian Government has a 50%+ stake in Gazprom through both direct and indirect ownership and this makes the company susceptible to the government agenda.
- Russian Recession – The Russian economy is currently caught in its longest recession in two decade. Although this is not specific to Gazprom, it does affect all the companies which operate in Russia.
Whilst the price has been hit hard over the past 2 years, dropping over 50+, I do believe that Gazprom has a great deal going for it. The company has the ability to rise again from the doldrums in currently finds itself in. Here are my reasons why I bought the stock recently:
- OGZD is so cheap right now – This is by far the biggest reason to buy Gazprom shares right now. The company’s stock is trading hands as obscenely cheap levels by any metric you wish to use.
Current Price to Earnings Ratio of just 4. Let me say that again. it has a P/E ratio of just six!
Put it this way, if you bought a private business at four times earnings, you would have earned all of your investment back in four years – assuming no growth. Every cent after that is pure profit.
Current price to Book Value of 0.3. For every $1 in assets, you are paying 30 cents. This makes it ridiculously cheap and gives you an inbuilt margin of safety
- Gazprom has so much power, not even sanction can stop it – even though there are sanctions on Russian companies, no sanctions have been imposed on Gazproms gas exports. Western Europe relies on Gas from Gazprom and this gives them the upper hand. Europe is so reliant on Gazprom that it cant wait for Cheniere Energy to start production. But even then, the power shift won’t happen as natural gas consumption will only increase over the years.
- It has remained profitable, even in the biggest decline in energy prices in recent memory. The company made US $12.2bn in 2015. This is phenomenal considering the energy price slump we have had coupled with all the negativity and sanctions surrounding Russian companies. One of the reasons is Russia has one of the lowest cost basis for extracting energy outside the middle east.
- The natural gas and oil prices are rebounding – Following on from the point above, the profits made by Gazrpom will continue to rise as the price of oil and gas goes up.
- It has a payout ratio of 20% but still has a a dividend yield over 5% – The yield you can get on the stock right now is truly amazing. The current dividend yield is about 5.5% but with the withholding tax, it brings it to about 5%. This is still amazing and the greatest part about this is that the dividend is covered 5 times by profits. This gives Gazprom the ability to raise its dividends consistently in the future.
- It has a fantastic array of assets – the company has extensive reserves of gas of proven gas and oil. It has used this to its advantge in order to strike deals and work in conjunction with the likes of Exxon Mobil and Royal Dutch Shell. Furthermore, the Gazprom has a vast network of pipeline infrastructure which acts as tool booth when other want to use it.
- China & India – With Asia’s two largest and most populous countries wanting more cleaner fuel, natural gas will be the natural choice. Even if Western Europe were to reduce their demand of gas when companies like Cheniere Energy set their plants up, Gazprom should not be too worried as it has two huge markets right on its door steps. Gazprom is working closely with companies like China National Petroleum Corporation in order to meet the growing natural gas demands that these two new superpowers have.
My Purchase of Gazprom (OGZD) stock.
As can be seen from the above, the things going for Gazprom far outweigh any negativities surrounding it. I believe that the stock has been unfairly hit by the market but it is in times like these that the best purchases are made. According to my own intrinsic value calculations based on future cash-flows, the company should be trading at £8.60; about double what it is right now.
Yesterday, I initiated a purchase of 181 shares in Gazprom (OGZD) at a price of $4.44 per ADR. The ADR is quoted on the London stock exchange and one ADR represents two Gazprom (GAZP) shares. When I take into account the 10% Russian Withholding tax on dividends, I am expecting to collect a total of £27.69 in dividends which Gazprom pays once a year in August. This gives me a dividend yield of just above 5% which I expect will only increase over the years.
I have bought the shares in my taxable account in order to offset the withholding tax.
To me, Gazprom offers tremendous value and it is an opportunity that I cannot miss. Whilst it does have its problems such as being susceptible to the politics of the Kremlin, I do believe that this is slowly changing. Only recently, Gazprom went against the Russian government policy of public companies having to pay out 50% of its profits – although this would have been beneficial to all shareholders. I do believe that the government has let off Gazprom this time and in the hope of collecting higher dividends in the future. I’m with the Russian government for once on this one, I too would want Gazprom to re-invest its profits in order to receive a higher payout at a later date!