Contrarian Buy-recommendations Gazprom (OGZPY.PK) and Lukoil (LUKOY) offer a repeat of the high rate of appreciation demonstrated in the 2000s along with the volatility demonstrated during the global financial panic of 2008. The companies’ home country, Russia, may deliver the higher growth of an emerging market economy without the higher debt of developed countries. Politically, the more traditional Prime Minister Putin has restored stability while the new generation President Medvedev strives to apply best practices to create greater prosperity and individual freedom. Despite full progress being years away, the main consideration for investors is that the trend continues positively.
The prospective payoff is more than 100% as measured by McDep Ratios for Gazprom and Lukoil at 0.39 and 0.43 respectively. First quarter results reported by Gazprom on September 3 and second quarter results reported by Lukoil on August 27 met or exceeded expectations. Prospective cash flow and long reserve life support estimated Net Present Value (NPV) of $64 a share for Gazprom, concentrated 81% on natural gas and $135 for Lukoil, concentrated 99% on oil.
The companies are strong financially with debt less than a 0.1 ratio to present value in each case. While Gazprom pays a small dividend, there is anticipation reported by Bloomberg that dividend payout may be raised. Lukoil stock has a competitive dividend yield at 3.1% a year. Stock prices and six-year futures prices for oil and gas are below the 200-day or 40-week average. Optimistic that those price trends will turn up as the uncertainties surrounding the U.S. election this fall get resolved, we believe patient investors can commit now on the basis of undervaluation of Gazprom, Lukoil and our other large cap recommendations
Originally published on September 7, 2010.
