The best investments are those that are simple and with Gazprom OTCPK:OGZPY it is extraordinarily so. The three main factors that will drive the share price higher are:
- Dividend growth
- Reserves and production growth
- Pricing growth
The first is perhaps the most simple to understand. Historically Gazprom has paid an extraordinarily low dividend for an Energy major, varying between 0 to 1%. However, since the financial crisis there has been a major uptick in dividend payments; 2010 saw an improved but still poor 2% payment. FY 2011 is a game changer; an earlier pledge to increase dividend payouts to 15% of profits will see the dividend for 2011 reach 5.1%, while a new pledge to increase this to 25% makes a FY2012 dividend in excess of 8% likely. I believe this dividend payment will encourage the international investor who wants a real return on investment, rather than pure Earnings accumulation.
The second is a bit more complex as quantifying oil and gas wells is generally not an exact science. However, the principle is remarkably simple. The future of global gas, contrary to the US belief of unconventional, is Artic conventional gas. Early estimates of Artic gas are in excess of 25% of global undiscovered gas. But vast emissions of methane from the artic and the few already developing gas fields show the promise. The most impressive is Shtokman, where 134 trillion cubic feet of gas is estimated by Gazprom, Total and Statoil. (To put this figure in context; it is greater than Iraq's total gas reserves the 11th largest in the world). This well is majority owned by, you guessed it, Gazprom. In fact, Gazprom have an exclusive right to gas in the Artic. Only Russian oil producer Rosneft is allowed by Russian law to search in the Russian portion - around 5/6 Sevenths.
Increases of 4% pa to Europe by Gazprom are needed to offset the declining gas wells currently supplying Europe - most notably from the UK. (As estimated by Bernstein's research report out today "The call on Gazprom"). But, on a production side China is the area of most excitement. Talks are on-going over a pipeline to China, that would likely be a deal worth 100s/1000s of $ billions. Russia currently exports oil and coal to China, the last part gas is only a matter of a time and only state champion Gazprom has the capacity and Russian interests to supply the gas.
The third; pricing growth is a very simple story. Currently, 55% of Gazprom's gas is used domestically (Russia) at a 75% discount to European prices. However, over the past few years as part of Putin's pledges and necessary liberalisation of prices for joining the World Trade Organization, Russia is increasing domestic prices by 15% per annum. This is signed into law, and so far the the increases have been as promised.
So, what does one pay for all this? A 3.3x PE and no, this is not a joke. I also predict that by 2020, Gazprom will be the biggest company in the world, and it will be the first trillion dollar company. On a reserves basis it is the biggest traded energy company on the planet.