Gazprom Hikes Output Outlook Amid Tensions In Syria

Summary

• Gazprom delivered 12% more gas YoY to Europe and Turkey than in 2016.
• FY deliveries are up 7%.
• Syria remains a political risk with Turkey the key player.
• Gazprom is sincerely undervalued for U.S. investors.

Gazprom (OTCPK:OGZPY) is a fascinating company to cover, not only because I feel it is one of the most sincerely undervalued assets available to investors in today’s market but because its business intersects with so many of the major geopolitical events around the world, most notably the rising tensions in Syria.

This week Gazprom reported its sales to Europe and Turkey in the first half of 2017 exceeded its expectations by 12%. And the firm raised its full year guidance for gas deliveries to a 7% year-over-year gain.

These numbers happen against a backdrop of minor changes in the European gas market, like Poland and Lithuania contracting for its first shipments of liquefied natural gas from Cheniere (CQP) in open defiance of the Russian state gas company’s plans to increase market share through the controversial Nordstream 2 pipeline expansion.

Syria-ous Ground

The escalation of tensions between U.S./Israeli forces and the pro-Assad coalition in Syria these past two weeks come while Turkey and Russia announced construction of the Turkish Stream pipeline is officially underway in the Black Sea.

Gazprom never stopped building its side of the above-ground portion of the pipeline, even when it was South Stream. Remember, Turkish Stream is simply a re-routing of the defunct South Stream pipeline that Bulgaria nixed amid intense political pressure from the EU and the U.S.

And Turkey is emerging as a very pivotal player in the next stage of the Syrian conflict. Its massing of troops and attacking PKK Kurdish forces near Afrin this week put pressure on the Syrian Defense Force/U.S. relationship as Kurdish fighters have slowed their attacks on the ISIS stronghold of Raqqa to possibly support their brethren against Turkey to the north.

This is not how a NATO ally is supposed to act but President Recep Tayyip Erdogan is furious with the U.S. for allying with the Kurds who he sees as terrorists.

And, to my mind, the picture is forming that Erdogan’s days of playing Russia and the U.S. off of each other to get what he wants may be coming to an end. The upcoming G-20 meeting could be a firestorm of shifting political alliances as opposed to the boring convocation of world leaders deciding our economic fate.

How Turkey navigates the next few months will determine what its future partnerships will look like. While it looks like a low probability at this point, it is possible that Turkey will exit NATO in the future. Whether it joins the rapidly expanding Shanghai Cooperation Organization [SCO] in the future is still very fluid.

Russia’s relationship with Turkey through not only Gazprom but Rosneft (OTC:RNFTF) and Rosatom, the state nuclear energy firm, which has major business deals in process with Turkey to build much-needed nuclear power plants to improve the consistency of the Turkish grid’s base load.

The Future

None of these developments are being priced into Gazprom at this time. The stock closed Q2 at the bottom of its long-term trading range at RUB118.4 per share. At the same time, both the Ruble and the Russian MICEX [RSX] have been under heavy selling pressure as capital flowed into Europe.

A surging euro (FXE) looks to me like panic buying on liquidity concerns after ECB President Mario Draghi’s statements this week spooked markets. Gazprom flirted with breaking down below its long-term support between RUB116 and RUB120 but held up.

There’s no question that Gazprom’s chart is awful at this time. The ruble is under pressure as well with lower oil prices and the Bank of Russia finally raising rates. But, like the surging euro is unsustainable, a weak ruble is as well as GDP growth looks set to outpace the eurozone and the U.S., foreign exchange reserves continue to rise and Russia's trade surplus is stable between $8 and $10 billion per month.

So, thanks to panic buying of the euro, the ruble and the Russian stock market are strong bargains for U.S. investors. This will only improve once the dollar finds its bottom and these markets reverse.

This is not an investment for the faint of heart but it is one that is looking for significant yield where the long-term political trends are all in its favor.

Gazprom announced that 2017’s dividend will be at least as large as 2016’s. This implies a yield of at least 7.1% this year. With short-term currency effects and some possible downside to begin Q3 before the ex-dividend date for the ADR, the price could drop as low as $3.70. But, honestly, downside is limited here even if oil prices fall back into the $30s on increasing supply and a fading ‘reflation’ trade.

Accumulating Gazprom for the yield alone is worth it to value investors. For contrarians, this is the ultimate call. The one that says U.S. foreign policy objectives are not being met and the structure of the post-WWII geopolitical world is ending. For all the talk about ending Gazprom’s ‘monopoly’ on the European gas market, the firm continues to increase its market share in Europe while it opens up new opportunities across Asia.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.