By Nick Hubble, Editor at Southbank Investment Research, a publishing company in London specialising in investment, market trends and technology.*
Gazprom is listed on various stockmarkets and trades at an extraordinary discount to its value. The reason is simple: the unpredictable conflicts between Russia and its geopolitical adversaries.With a price-to- earnings (P/E) ratio of 3.8, Gazprom’s shares are up to ten times cheaper than those of its peers. The share price has been in a trading range since the crash of 2008, putting the company’s market value at over $50 billion. The dividend yield of 6% makes Western peers pale in comparison.
Profits have held steady above $5 billion, even as commodity prices fell. Ratings agencies have mediocre ratings on the stock, but the company is still investment grade.
It’s the company’s geopolitical importance that’s the big threat. The Russian government owns slightly more than 50% of shares and Gazprom owns 72% of Russia’s natural gas reserves, including 66% of the actual output. That’s 17% of the global reserve and 11% of the global output.
But that’s not the crux of the geopolitical problem. It’s delivering that gas to homes and businesses to Russia’s west that’s the issue. Here, Russia’s relationship to Europe and Europe’s ally the US is what gets Gazprom into trouble.
On the one hand, the firm is a key provider of gas to much of eastern and central Europe. On the other hand, it is a tool of the Russian government to control and interfere with those regions’ stability. The 2009 conflict is a perfect example of how this can go wrong for Gazprom.
The company lost an estimated $1.5 billion in revenue when it halted gas supplies to Ukraine. The company demanded payment for past deliveries of gas and Vladimir Putin and Ukraine’s Yulia Tymoshenko had to intervene. Not that they weren’t behind the conflict to begin with. Tymoshenko was later imprisoned for her role in solving the dispute. Ukrainians froze to death without the gas.
If you expect tensions between Russia and the West to worsen, Gazprom’s cheap price is justified. Economic sanctions are a basic part of the conflict between Russia and the West. But if the Russian scaremongering ever dissipates, Gazprom could be the best investment of 2018.
Check out my energy picks for 2018 on the Capital & Conflict website. See more articles from Nick Hubble on geopolitics and central banks.
*Southbank Investment Research publishes three websites and several newsletters.
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