Gazprom: Betting on Russian Natural Gas

Gazprom is the world’s largest gas business engaged in natural gas, gas condensate and oil prospecting, production, transmission, processing and marketing both inside and outside Russia. I have been very bullish on Gazprom (OGZPY.PK) in January 2012 because the fundamentals of this company were very positive. You can read my previous analysis here. I noted that Gazprom was severely undervalued and had a P/E of 3.5, handed out a dividend of 2% and had a price to book value of 0.6. Since that article, the stock price of Gazprom has gone down 15% (Chart 1). I recognize that was a bad call. The decline has much to do with the worsening conditions in the Eurozone.

So what has actually changed for Gazprom since January 2012?

Read the full analysis here.

Chart 1: Gazprom (Micex)

Natural Gas Market between West and East

Natural gas prices around the world, in contrast to oil prices, do not have the same price level. For example, natural gas prices in Russia (Chart 1) have been steadily going up in price since 2010 (almost up 100%), while natural gas prices in the United States (Chart 2) have been going down since 2010 (almost down 50%).

Chart 1: Natural Gas Price (Russia) US dollars/1000 cubic metres of gas

Chart 2: Natural Gas Price (U.S.) US dollars/1000 cubic metres of gas

To illustrate how this can affect domestic natural gas companies we will compare the biggest natural gas producers of Russia and the United States in valuation and price level. These companies are Gazprom (OGZPY) and Chesapeake Energy (CHK) respectively (Chart 3).

Chart 3: Comparison between Gazprom (OGZPY) and Chesapeake Energy (CHK)

Since 2010, Gazprom has outperformed Chesapeake Energy by 15% and will continue to do so if the price trends of natural gas in Russia and the United States keep going their way.

Gazprom’s net sales grew 31% and net income grew 41% from 2010 to 2011, while Chesapeake Energy’s natural gas and oil sales were stagnant and net income available to common stockholders even dropped 20% from 2010 to 2011.

This is again, evidence that Gazprom will outperform Chesapeake Energy if this trend in natural gas prices continues onwards.

Gazprom benefiting from Europe’s snow: OGZPY

Natural gas prices have been plummeting more than 50% since its peak in 2010 and is attributed to the huge oversupply in natural gas. More and more natural gas has been found while consumption doesn’t keep up with supply. But as Marc Faber famously quotes: “The best time to buy commodities is when markets are glutted”. This is because the prices are the most depressed during these times. One company that I highly recommend is Gazprom (OGZPY), due to its exposure to natural gas and oil. To see why I recommend to buy Gazprom please go to my article located here: Gazprom benefiting from Europe’s snow: OGZPY

It’s important to monitor the Russian natural gas price which can be found here:
http://www.indexmundi.com/commodities/?commodity=russian-natural-gas&months=60

Notable is that natural gas prices in America are plummeting, while Russian natural gas prices are going up.