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Europe's Late Winter Deep Freeze Makes Further Gazprom Pipeline Obstruction Very Unlikely

Zoltan Ban profile picture
Zoltan Ban


  • In the immediate aftermath of the Ukraine crisis in 2014, a very dominant public perception took hold, which assumed that Gazprom was set to lose European market share.
  • Since then, the opposite has happened, with its share of a growing European market increasing from 30% to about 35%, with new export records being set.
  • Given Europe's return to economic growth as well as the continued decline of domestic supply, Gazprom's share of the market is only likely to increase, with new pipelines helping along.

It was just four years ago that relations between the EU and Russia were seemingly entering a period of irreconcilable differences as the crisis in Ukraine was escalating. There were sanctions and counter-sanctions. The South Stream pipeline was obstructed in 2014 by the EU, which leaned on its poorest member Bulgaria in order to obstruct the pipeline from reaching EU shores. There was more and more talk of replacing Russian gas with LNG from the US and elsewhere. To make matters worse for Gazprom (OTCPK:OGZPY) and for Russia, oil prices started plummeting in mid-2014. As most of us already know, in much of the old world, long-term pipeline gas contracts are tied to oil prices, so in addition to Gazprom seemingly looking like it was set to sell far less natural gas to Europe, it was also being threatened with lower natural gas prices. 2014 was most definitely a bad year for them, and at that point, most indications were that things were mostly set to get much worse, as most media reports, as well as political rhetoric, suggested that Gazprom was set to lose its most important export market. Five years on, I have to say that things are not looking anything like some people thought or hoped back then. Looking forward, things are, in fact, looking extremely good for Gazprom, when it comes to its natural gas export prospects.

The China Deal

At the time it was seen as a desperate move to salvage the overall situation in regards to Gazprom's gas export prospects, but the Power of Siberia pipeline deal, which will have a capacity of 38 Bcm/year is clearly not the desperate money-losing enterprise that it has been portrayed to be in the Western media.

Source: Financial Times

At the time of signing, it was estimated to

This article was written by

Zoltan Ban profile picture
My name is Zoltan Ban,  I have a BA in economics. I am a personal investor with over a decade and a half of active trading experience.

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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (34)

Lbastie64 profile picture
But markets don’t care...
stephenmcmahon83 profile picture
Gazprom says it's production is up 17% y-o-y and European exports are up 30% y-o-y! Earnings should be very strong this year:

Lbastie64 profile picture
Also, inventories of Western Europe countries are depleted... so q2 will be strong as well. + oil prices higher than last year
stephenmcmahon83 profile picture
For some fun with math. As many of you may know, Gazprom owns 95% of Gazprom-Neft. On 1/1/2016, Gazprom-Neft's shareprice was $9.65 and it's market cap was $9.25B - today it's shareprice is $24.63 and it's marketcap is $23.62B.

Gazprom (OGZPY) on the other hand, had a $3.59 shareprice on 1/1/2016 and a 40.65B market cap, compared to a $4.76 shareprice and $53.96B market cap today. Why do I mention this? Because what it means is that the entire price appreciation of OGZPY since 1/1/2016 has been due to the increase in Neft's market cap (23.621B-9.25B * .95 ownership stake) = $13.64B vs a $13.30B increase in OGZPY during that same period. In otherwords, the market values OGZPY less as a standalone company today than it did on 1/1/2016.

This is interesting, when you consider the full-year 2015 result vs 2017 results: OGZPY total revenue: $7.21B in 2015 vs $9.96B 2017. Total EPS: $.94 vs $1.29 today. Tangible Book value: $12.59 in 2015 vs $17.59 today. The company is better by basically every metric, yet the stock market is pricing it at a lower valuation today than it was 27 months ago. Amazing.
Lbastie64 profile picture
when does GP pays dividends?
Mike_Frenchie profile picture
From experience the execution date is around mid July and one month later on your bank account (August)
More anti-Russian rhetoric in the UK press today after the nerve gas attack on a Russian and his daughter in Salisbury, a peaceful Cathedral city in Wiltshire yesterday. There are allegations the Kremlin was behind the attack but no evidence so far. This will affect UK/Russia relations just as we are buying more of their gas.
I have owned GasProm for a couple of years and was thinking of buying more for the dividend.
Mike_Frenchie profile picture
I am a long time Gazprom supporter (and shareholder) and things seem to be going the right way.

Recently, it seems that Gazprom lost the arbitration in Stockholm (or partly lost - not frankly clear) and decided to break the contract to supply gas to Naftogas (Ukraine). Today, Ukraine is seizing Gazprom assets - this does not look good for the future cooperation and the US is doing everything it can to make things worst (by delivering anti tank weapons to Ukraine).

I hope Nordstream2 is completed quickly but Sweden and Denmark have clearly decided to slow down the process as much as they can... (by not delivering permits, etc.) since they are opposed to NS2 (they hate Russia and they are probably worried to show how their ridiculously expensive "green energy" poorly perform versus Russian gas).

Zoltan, we will for sure need another Gazprom follow-up later this year! Thank you for your excellent analysis.
Mike: Sweden and Denmark do not have anything to do with NordStream 2, and any other countries, apart from Germany and Russia, either. It has been designed this way, purposedly.
stephenmcmahon83 profile picture
'Germany still backs new Russia gas pipeline'
March 5th, 2018


"The latest Russia-Ukraine gas dispute has not dampened Germany's enthusiasm to build a new pipeline from Russia.

The pipeline, Nord Stream 2, was a "purely commercial project", Steffen Seibert, chancellor Angela Merkel's spokesman, said in Berlin on Monday (5 March), according to the Reuters news agency.

He urged Russia not to use Nord Stream 2 to cut off Ukraine in future.

It was "in the interest of Germany and Europe that Ukraine continues to play a role as a transit country for Russian gas," he said.
Mike_Frenchie profile picture
Chris, I sincerely hope you are right but I think that these two countries have a word (permit) since NS2 goes in their water. I even remember that Denmark changed its law on purpose - I wish you are right and I will double check.
great article

you seem to believe in the future of gas more than renewables

am i right ?

deblonde, even if working as planned, renewable needs a backup power, which is usually a gas turbine. In small European town where I am living, we have a geothermal central heating station, which after being 10 years or so in use, needs now to be dismantled, because it is turned out being very unstable, unreliable and very often broken.
As usual, a smart, thoughtful, well written, well researched, article by Mr Ban---------that is why Seeking Alpha is a must read every, I mean every day!!!
Lbastie64 profile picture
This worry about the European economy is not credible. The European economy is just getting out of the crisis with all engines on fire: Germany, Spain, UK, even France and Italy getting better. Of course, one day there will be a crisis, but not in the next 18 months.

Other factors:
-Netherlands getting out of Gas production because of earthquakes is real
-Germany needs to replace the coal power plants that replaced the Nuclear power plants by clean stuff. Gas seems go for them :)
-Huge inventories of oil & gas vs other companies...
Lbastie64 profile picture
Gazprom indeed owns more than 90% of GP Neft!!!
stephenmcmahon83 profile picture
I agree with the author's points - and for all those who think Russian stocks are "doomed" I encourage you to look at Sberbank (SBRCY) which went from $3 per share in 2013 to over $20 today and Gazprom-Neft (GZPFY) which went from $9 per share in January 2017 to $22 today. (Gazprom has a 25% ownership interest in Neft, by the way).

Back then I knew both of those stocks (SBRCY and GZPFY) were very undervalued but didn't have the courage to stick to my convictions and take a large position in them, because I read all the western media and was scared out of my position. Not making the same mistake again. I own 20,000 shares of OGZPY and will not sell for a penny less than $18.00 (tangible book value).

Without those Russian pipelines, most of the EU will freeze to death in the winter. US LNG breakeven cost is 25% higher than Gazprom pipeline deliveries - there literally is no real competition. Big CAPEX spend will be a drag for the next couple of years, but once the dust settles, Gazprom will be one of the most vitally important companies on earth.
Fully agree!
azbroker profile picture
GAZPROM (OGZPY) owns above 90% of gpNEFT not %25.
Gazprom owns not 25% but 95% stake in Gazprom-neft.
as for the rest, I would agree with you....
the biggest problem for GAzprom(stock) is that it immidiately reacts on all the negative news (clashes with the Ukraine concerning transit contracts and the Stockholm arbitration court decision, future negative FCF (till 2020 or 2022), too big CAPEX(and some experts doubt all these new pipeline capacities will be fullly demanded), very long payback period for pipelines to China,minor oil fluctuations etc) but absolutely doesn't react on positive news...And investors - even those who track fundamentals - are not so aggressive to move prices much higher...
Zoltan, great article, next time I expect to see you own some shares in the disclosure!
overvloedgolf profile picture
The earthquakes in the gas area here in the Netherlands have become a big political issue and the new governement decided to reduce the gas production even more. I think within 10 years it will be reduced to zero.
Zoltan, I expect next time to see that you own shares in the disclosure!
Zoltan Ban profile picture
Thank you for your comment dimitar. Unfortunately, I only end up owning a relatively small percentage of stocks I analyze and find to be promising. My portfolio never exceeds 10 stocks, currently I own six. As I pointed out already, it is a company that I have been tempted to buy in the past few years. Its fundamentals and prospects always looked much better to me than the market has been factoring in. The one thing that held me back has been the fact that I fear for its main export market's continued stability.
Calculus profile picture
Completely ignoring North Sea energy production? Really?

Absolutely ridiculous.
Not long Gazprom or the Russian ruble.

Canadian Dollar is the target of the Trump Tariffs.
Gazprom is a promising stock at a very low valuation. Political risks remain but given the fact that European productivity depends on the availability of cheap gas from Russia, it‘s a buy.
TheJollyGreenMan profile picture
Unlike the author of this article, I am in the fortunate position to be a GAZPROM shareholder. The only moan is that my holding is too small. The dividend payment was re-instated a few years ago and makes my GAZPROM a Jewel n the Crown.
Zoltan Ban profile picture
Thank you for your comment JollyGreenMan. Gazprom has been on my radar as a possible investment opportunity for the past few years, and on many occasions I was really tempted. The one factor which has been keeping me from taking the plunge has been my fears in regards to its largest export market, namely Europe entering another crisis, which could hammer the local economy, dampening demand for gas. I never bought into the idea that Europe will pass up on Russian gas in favor of more expensive LNG, but I am worried that the EU might not hold together, and a crisis might be sudden. Still, very tempting!
Zoltan: "Europe entering another crisis, which could hammer the local economy"

In case of any crisis, Europe will still need gas. Plus, some huge new markets of Gazprom include China, India, and probably Japan.

Long Gazprom.
Zoltan Ban profile picture
Thank you for your comment Chris. Of course, they will still need gas, but less of it, especially if we see more industrial contraction like we saw post-2008. Less demand means buyer's market, meaning less potential profit for Gazprom. Of course, while there is a perceived risk of an EU implosion, it may not happen for a very long time, in which case I think Gazprom is a great potential investment.
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