Gazprom, Lukoil: Investor Patience Required While Russia Debates Taxes

Gazprom (OGZPY.PK) and Lukoil (LUKOY.PK) are the only stocks among our large cap buy
recommendations that are not trading above their 200-day stock price average. Moreover, those two stocks also have the lowest McDep Ratio in the Mega Cap and Producer/Refiner groups respectively.

Investors may need to be patient as the Russian government considers a natural gas excise tax while relaxing price controls on natural gas. The U.S. set the example before the Iranian Revolution with a politically expedient excise tax while relaxing price controls on oil.

The tax soon went away as commodity price continued to rise and economic pressure built to encourage investment in new supply. Meanwhile the stock price of Gazprom, the world’s largest producer, may benefit as the global long-term price of natural gas, which has also been stagnant for awhile, has started a new trend of advance compared to oil (see chart Oil/Natural Gas Futures Ratio, below).

The stock price of Lukoil, which earns more than 40% of its cash from refining and marketing where taxation is lighter, may benefit as global futures prices for the crack spread are favorable (see chart One-Year Refining Crack Meter, below).

Comments

[ErnieMontague]

While I am huge fan of Kurt Wulff, use his website for investment advice, and totally love his McDep ratios as a quick analysis of company worth, I am not at all interested in the Russian stocks.

Russia has no history of long term stability in the capital markets, has already de nationalized and re nationalized the oil industry, first selling state assets at pennies on the dollar under Yeltsin, and then stealing them back under Putin to crush oil oligarchs and put the companies in the hands of Putin cronies.

What this means for me, in the long term ( and today it looks like BP and Shell are getting their huge investments stolen away) is there is NO continuity of management, capital asset stability, or long term policy in Gazprom or Lukoil. And that means their share value, ownership, and income stream will have no prayer of a long term accountability. Putin and his successor (if he does not amend the law to stay in office for life) will continue to play fast and loose with the HUGE oil income that has brought Russia to a place of world power.

Europe depends on Russian gas for economic stability, and will probably roll over for any Russian bully market hi jinks, to the detriment of any outside investors. Russia has some interest in being a "good citizen" in the world markets, but also has huge economic power and can pretty much dictate terms to shareholders and foreign investors.

I would not touch either company with a ten foot pole.