OMV: An Overseen Hidden Champion In The Central And Eastern Europe Region

| About: OMV AG (OMVJF)

Summary

OMV has a strong portfolio with high-quality fields in the U.K., Norway, Madagascar, Tunisia and Romania.

Its strong ties to Gazprom, a major gas supplier to Europe today and the foreseeable future, are improving.

OMV has an attractive valuation, a stable and growing portfolio, and a strong focus on highly profitable upstream business.

OMV (OTC:OMVJF), or Oesterreichische Mineraloelverwaltung, is a major player in the upstream and downstream oil and gas industry in central and eastern Europe. In this article my special focus will be on the recent developments, especially the South Stream pipeline and attractive upstream business.

Nabucco and South Stream

OMV is a key player in the region of CEE; the government of Austria and the state fund of Abu Dhabi are the major stakeholders in the company. Historically, Austrian politics have supported strong ties to the Russian company Gazprom. For a long time, the EU has tried to get gas from Azerbaijan to bypass Russian supply due to delivery stops in political crises. After the Nabucco project failed, Russian gas giant Gazprom signed a Memorandum of Understanding for the South Stream pipeline, which will bring gas from Russia through the Black Sea, Bulgaria, Serbia, and Hungary to Austria.

From Austria, the gas will be passed on to other western European nations. The main advantage of the pipeline is that Ukraine will be bypassed. And as long as both sides, Russia and the EU, make enough money through gas, this pipeline should be good for the future of both. OMV will hold a significant share of the pipeline operation and will also be able to put its recently found reserves off the coast of Turkey in the Black Sea online through the pipeline.

Nowadays it is seen as very likely that the Nabucco project will not be realized, and therefore the South Stream Project is a high priority project, even after the Ukraine crisis. Baumgarten, close to Vienna, will be the hub for the gas distribution in western Europe. It is also very likely that OMV will be able to receive a discount for natural gas imports from Gazprom.

Although its Romanian subsidiary Petrom was a big challenge, today Petrom seems to be running much better than before. Also, the share price has been under pressure in the past 12 months, especially because of restructuring and political reasons. I think it is a good stock, with low trading volumes in comparison to the big oil firms, and could easily gain 15%-20% in the next couple of months to a year. However, sometimes the political issues are a factor and you have to consider that as well when making an investment (sources: Neue Zürcher Zeitung).

Valuation

The P/E ratio for 2013 is at about 9.80. Royal Dutch Shell has a P/E ratio of 9.90, Exxon Mobil one of 13.45, Eni one of 13.50, Total one of 12.50, and BP one of 6.50. Compared to its peers, OMV seems quite undervalued, when taking BP as an exception because of the Deep Water Horizon disaster. During the past six years, the turnover of OMV has more than doubled. Nowadays the annual turnover is at about EUR 43bn. This makes OMV the largest firm by turnover in Austria. Furthermore, in terms of efficiency, the firm has improved a lot. Take a look at the number of people employed six years ago and now and the profits being made. The dividend yield is about 3.6%, which lies in the middle of all oil producers.

Political View

Many people underestimate the strong ties between Russia and Austria. Since it's the largest governmental company, politics is rather supporting the aims of OMV. But the situation between OMV and the government has been much better previously, and is worsening. Also, the company with the second highest turnover in Austria is a Gazprom subsidiary (amounting to EUR 18bn for 2013). Both companies have a great business relationship and Russian businesses see Austria as a close and safe haven that is not too westernized, only two hours away by flight from Moscow. Political stability and its neutral status are key advantages for the Austrian business environment that is seen as a bridge between the Eastern and the Western world.

Management

CEO of OMV, Dr. Gerhard Roiss, seems to be a man with a lot of experience in that sector. In 2011 he was appointed as CEO and has been busy restructuring the firm since then. Dr. Roiss has a good reputation and a deep understanding of the sector.

Conclusion

In all, I think that OMV is a solid middle class oil producer that is undervalued and has an upside of 15%-20% over the next six to 12 months. It is also off the radar for many institutional investors as it trades mostly on the Vienna stock exchange, which has not-too-high volumes and therefore does not appear in many funds. Recently, the stock has been under pressure a bit because of the Nabucco project failure and other smaller issues, but from my point of view the company has a strong balance sheet, provides steady income, and has made its position as a key player in the CEE region very clear.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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