What Gazprom Has Going For It

Mar.15.11 | About: PJSC Gazprom (OGZPY)

Buy-recommended Gazprom (OTCPK:OGZPY) offers unlevered appreciation potential of 88% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of $56 a share. A long awaited contract to furnish natural gas to China may be finalized by mid-year. Agreement has been reached to tie the price to crude oil, the customary unbiased standard in natural gas-starved Asia. The final issues to be resolved include timing and penalties for not meeting a schedule.

Seeing Russia as a solution to China’s pollution, we think that a profitable relationship with China would be a strong, long-term positive for Gazprom stock. Patiently skeptical that the two hard negotiators could reach quick agreement, we were encouraged to hear the first-hand impressions of Deputy Chairman Alexander Medvedev at Gazprom’s Investor Day in New York on February 17.

Meanwhile, third quarter results by international accounting disclosed on February 11 met our volume and cash flow expectations last detailed five months ago. Natural gas price outside the U.S. has held up better and is coming back faster than expected. While further gains are likely, our projected cash flow at the current price merits, we believe, more than the company’s McDep Ratio of 0.53 and unlevered multiple (EV/Ebitda) of 3.8 that are among the lowest of our buy recommendations.

Gazprom stock trades in an uptrend above its rising 200-day average. Finally the most important indicator of industry opportunity, the long-term price of oil, trends up with current quote of $99 a barrel above the rising 40-week average at $88.

Originally published on February 22, 2011