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Gazprom Beats The Odds As Pipeline Projects Progress

Tom Luongo profile picture
Tom Luongo


  • Gazprom's earnings were operationally very strong.
  • Pipeline projects have survived most political risks.
  • Gazprom's future is very bright as major projects will not hit the balance sheet until 2019.
  • The ruble exchange rate is the biggest short-term risk for U.S. investors.

The political risk surrounding Gazprom (OTCPK:OGZPY) has always been high. But it's never been higher than it is right now. With three major pipeline projects in various stages of completion, the company is at its most vulnerable to changes in the political landscape.

This vulnerability is reflected in the firm's year-end earnings report where, in broad strokes, revenue, gas deliveries, oil production, and gross margins were up, and bottom-line profit was down.

The main reasons for this were the Stockholm arbitration award to Naftogaz that, while still under dispute, has to be reflected on the earnings report and squaring of capex allocations versus deployment. Gazprom, according to the earnings call, under-deployed its 2016 capex budget and spent it in 2017, thereby shifting numbers around on the earnings report.

Net debt rose by nearly $7.5 billion, mostly associated with the financing deal for Nord Stream 2. The board recommended holding the annual dividend payout the same as last year at RUB8.04 per share, which translates to a 5.6% yield at a current price of RUB144 per share.

And, that is the major part of the story with the company. There are three major growth drivers for the company under construction that will not begin adding to the top or bottom line until 2019 and that is what makes this report, in effect, unremarkable.

Pipeline Hostility

So, how has this company beaten the odds? Simple. It has successfully navigated the geopolitical and legal challenges to two of its major growth vectors into the European gas market, reducing the probability of these projects not becoming reality in the near future.

Nord Stream 2 was just granted the last of the environmental permits necessary to begin construction from Finland. Gazprom also just announced that the first deepwater train to Turkey for the Turkstream pipeline

This article was written by

Tom Luongo profile picture
I am a former research chemist by trade and an Austrian Economist by study and a market analyst by choice. For the past four years I have been a Senior Financial Editor with Newsmax Media publishing my thoughts on where markets, central banks, gold and geopolitics meet and explode.  I am now the publisher of Gold, Goats n' Guns, a monthly newsletter offered through Patreon.  I have been an investor and market analyst for more seventeen years and am an astute observer in changes within the culture and the political landscape. Feel free to find me on: My personal blog, Giold Goats 'n Guns: www.tomluongo.meYou Tube: https://www.youtube.com/channel/UC54PyZuVrDrhbWc6UqNjEBALinkedin: http://www.linkedin.com/pub/tom-luongo/5/384/a59/ Twitter: @TFL1728 Patreon: www.patreon.com/goldgoatsngunsPeriscope: @tomluongo (Mondays at 8pm and Fridays @ 9pm EST)

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.

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Comments (71)

Lbastie64 profile picture
Record production and sales year to date:
It is more profitable for the USA to sell LNG to Asia and South America and it is more profitable for Europe to buy LNG from Russia. We should make business not war.
Warren Buffett007 profile picture
Europe not buy much LNG from Russia , because is much more expensive than Pipeline gas !
Sorry Warren, I did want to say Pipeline North Stream 1. Now they started to built North Stream 2. Merkel was today visiting Putin to get a solution with the Ukraine.
Prezzo giusto profile picture
USA threatens against Nord Stream II : https://bloom.bg/2rOCY3a
stephenmcmahon83 profile picture
The empire is becoming pathetic at this point.

"If Europe allows it's people to heat their homes using cheaper, more reliable Russian pipeline gas, we will impose economic hardships on your countries."

And these same people call Russia a dictatorship?
EU is ready to talk about deliveries of LNG to Europe from USA in exchange to avoid metal tariffs implementation.
Lbastie64 profile picture
5.8% for me (before tax)
stephenmcmahon83 profile picture
Reuters: 'Gazprom confirms it will pay 8.04 rubles per share dividend'


At current exchange rates and with the 2X1 ADR conversion, this works out to about 25.5 cents per ADR share, subject to 15% withholding tax for US citizens. Stock typically goes ex-dividend in mid-July. Works out to be about a 30% annualized dividend for those who buy today and hold 2 months. Not bad.
Lbastie64 profile picture
But markets don’t seem to care...
Warren Buffett007 profile picture
Better for me ! I still buy cheap cheap !
Lbastie64 profile picture
Russia's Gazprom says may exceed 2018 gas output forecast of 475 bcm
ReutersMay 14, 2018
MOSCOW (Reuters) - Russian gas exporter Gazprom (GAZP.MM) could exceed its 2018 gas output expectations of 475.8 billion cubic metres (bcm), Deputy Chief Executive Officer Vitaly Markelov said on Monday.

Markelov also said Gazprom was in talks with Turkey about the construction of the second line of the TurkStream gas pipeline.
stephenmcmahon83 profile picture
Russia To See Oil Revenues Jump Fivefold


"Due to the oil price rally, Russia expects its oil and gas revenues to jump fivefold compared to the expected revenues set in its 2018 budget, according to the Finance Ministry that now expects Russia to post a budget surplus for the first time since 2011.

Oil and gas exports account for around 40 percent of Russia’s federal budget revenues.

Russia’s revenues from oil and gas sales are now expected at US$44.4 billion (2.74 trillion Russian rubles) for 2018, up from US$8.5 billion (527.6 billion rubles), according to a budget amendment by the Finance Ministry.

Due to the unexpectedly high oil prices, Russia is currently on track to book a first budget surplus since 2011, at 0.45 percent of gross domestic product (GDP), compared to previous expectations for a 1.3 percent of GDP deficit. The previous forecasts, however, were based on assumptions that the Urals crude blend would average around $40 a barrel. Between January and April, the price of Urals has averaged $66.15.

The additional oil revenues that Russia has earned above the Urals price assumption of $40 a barrel will be allocated to reserves instead of to spending, TASS news agency reports.

Analysts commented on the proposed budget amendment that Russia will have more revenues while it continues to plan for expenditures close to the original budget law.

“This will provide a very useful cushion to lean on if there are some adverse macro or geopolitical shocks,” Ivan Tchakarov, chief economist at Citi in Moscow, told Reuters."
stephenmcmahon83 profile picture
OGZPY +2.33%....Global investment community waking up to the fact that the US is no longer a dependable ally to the EU/Asia?
GS raised their target price for gazprom till $7...
user278...: "miserable". Yes, it is a right word for Poland (with its expensive new LNG-terminal) receiving just one tanker of LNG during a year altogether...

Ha ha ha
stephenmcmahon83 profile picture
"Merkel Says Europe Can't Count on U.S. Military Umbrella Anymore".....but Germany can count on cheap Russian pipeline gas. This is assured.
stephenmcmahon83 profile picture
Gazprom - stable, dependable, and cheap pipeline energy for the EU/ME/Asia regions during a time of massive geopolitical uncertainty.
you are right... But Poland and the Ukraine (unfortunately) don't share this view...and actively oppose all the new Gazprom's projects in Europe..
Lbastie64 profile picture
Honestly! Ukraine isn't part of the EU and Poland weighs very little vs France and Germany.
Poland and Ukraine use Russian gas, get transit payments of a Russian gas and blackmail Russia and Germany to get more payments from them.
Chris, agree, this sounds as stupid as implementing electrical cars together with shutting down nuclear power plant, or letting millions of illiterate migrants to the Europe, which already has a great dis-balance between working and not working population. Haha, indeed.
Breaking the Iran deal by Trump can be good for Gazprom, because ultimately its success in Europe depends on willingness of EU states take their heads of of their bums and start practicing European foreign policy. If this is where EU wants to draw a red line for Washington, Gazprom projects in EU are safe too. If not, probably US can force EU to abandon Russian gas and start buying LNG. It can also be, that Trump offers to let EU to keep their businesses with Iran, but "in turn" to move to LNG.
Frugal_guy: the USA supplying Europe with LNG is exactly as fantastic idea as Musk supplying the world with cars.

ha ha ha
USA already exports LNG to europe.. Though supplies are still miserable.. and its still more profitable to sell LNG to Asian and latin American countries..
Lbastie64 profile picture
SO, if ruble ups 50% (60 > 45), dividends grow 100% (conservative, assuming profits excluding oil price impact) and oil and gaz stays at 75$ (+50% yoy), that gives us a potential of 15-20 usd, 3-4x...

The only risk is more sanctions.
Ibastos: if there will be more sanctions, the Ruble will not appreciate. It will weaken. Providing even more profit for Gazprom. So Gazprom's management and shareholders must be wishing for more sanctions, I suppose...

ha ha ha
there are three more risks...1.Oil will certainly not stay at current levels in the long run...Gazprom's contract prices are still pegged to oil prices(though with a 6-9 months lag) 2. Foreign investors will start more actively withdraw their money from EM as soon as Fed continues raising interest rates. It seems to me expectations for RUR to strengthen(against USD) come true only when foreign funds stop selling Russian gov.bonds + Russian finance ministry will not be so actively buying USD for their funds(keeping exchange rates above 60). As for equities, Russia(or EM) oriented ETFs(or index funds) will have to sell major positions(when they have redemptions). Gazprom still has a big share in many indices..
3. there is a big risk the company will initiate new capital-intensive projects(pipelines, gas-chemical plants etc.) when all these projects start paying back - nobody knows.
user278...: I have explained several times (in this topic as well) that a weak ruble contributes highly to the profits of Gazprom, Rosneft etc. and to the revenues of the Russian government as a result. So Gazprom's shareholders, the Russian government being the largest of them, should be wishing for a weak ruble, i.e. welcoming any new Western sanctions.

Ha ha ha
stephenmcmahon83 profile picture
Reading all of these comments, and would like to share some various thoughts:

1) "Gazprom has been dead money for a decade"

Yes, but Wal-Mart was dead money for a decade too (1999 price reached $70 per dollar and did not eclipse that high market until 2013).

Also, the USD has basically doubled against the RUB since 2012, which negatively affects things for Russian companies.

2) "If this is such a good investment, why is it just sitting there so cheap."

Well, natural gas prices on a global basis are sitting at 30-year lows, for starters. Investment funds, brokers, analysts, investment banks in the West generally avoid Russian companies (especially with high govt ownership %) out of fear of retribution for all the sanctions the West has levied against them over the last 5 years.

In many ways, the US wants to keep Americans out of investing in Russia. Proof? Go find me an ETF trading on the US stock exchanges that allows you to buy Russian Rubles or Russian debt. I've looked for years, and I cannot find any.

Why is this? It could have to do with the fact that Russian sovereign debt yields 8% even though they country has a debt-to-GDP ratio of 20%, compared to 2% yields in US debt markets and out debt-to-GDP ratio well over 100% now. The Western media will never tell us this, but Russia is actually a financially healthier country than America is in terms of self-sustainability.


You have to have the ability to think-outside-of-the-box a little bit when it comes to investing in Gazprom. For example, many people run away as soon as they see that the Russian govt owns 51% of the stock. I actually think that is a good sign - the Russian govt collects the same exact dividends that we collect from Gazprom. I believe this ensures that my dividends are much safer coming from Gazprom than elsewhere. I like the idea that Vlad Putin's financial interests are aligned with my financial interests.

Secondly, look at the valuation. Gazprom earned $11B in profit last year and has a $50B market cap (even after getting hit with the big $3B gas dispute fine with naftogaz). Amazon earned $3B in profit last year and has a $770B market cap for comparison.

Thirdly, look at the projects. Power of Siberia I, and possibly II. Nordstream II, and possibly III. Turkstream. These are all massively important projects that will be completed in the next 1-2 years that will guarantee Gazprom is still around 50 years from now. Can you say the same thing about 95% of the companies in your portfolio?

I could go on and on, but I won't. People don't appreciate a company Gazprom until a real bear market hits. Right now it is all 2% interest rates, unicorn, FANG, and rainbows. Once the tide goes out, perceptions may change dramatically.
Lbastie64 profile picture
Thanks. Good comment. Let's be patient indeed with this stock, while it pays 5% on dividends and while oil prices increase (and gaz with six months delay...)
Warren Buffett007 profile picture
To 1: Dead money ?? around 6% dividend shield is dead ?
When Gazprom finish all the projects, the Russian government will claim the 50% of the nett earnings in dividend like from the other Companies, Gazprom actually are exempt of pay 50%, actually pays 25% of the nett earnings1
As I mention before, if you get in in any Russian stock, you will double it in the next years, because the Ruble will recover !, that's what I mean all the time !
stephenmcmahon83: as for debt investing, you may try FXRU which holds Russian corporate bonds: https://yhoo.it/2HZ0Try

Nevertheless, I agree that it is hard to find such an instrument, and it is intentionally so. One of my online traders, Internaxx has unilaterally banned the trading of most Russian securities (and without any warning, as one can expect from that bunch of inept clowns, they have actually made me a huge loss when they refused my buying order for Rusal shares, again, unilaterally and without any warning, I should sue them if I had the time). With my other trader, Saxo, however, I can buy even ruble-denominated Russian government bonds, in 1 million ruble packages.

Now, I am really wondering, whether this highly censored website will allow my comment through... This censorship of the Western media is already worse than the Soviet ever was. They are just afraid of the truth, those miserable, censoring clowns.
Warren Buffett007 profile picture
10 years ago I said that Apple was a good investment! Warren Buffet said that this business model had no future, now 10 years later he purchase on top of the Price! ??
The Markets in most of the times, they have no explanation!
But as he always said "The markets are manic-depressive"
By the way, I don't care what other investors do !
And I don't understand the writer of this Article, because he mention few times the Ruble, but
this is another "win" situation, because the Ruble will not be there in few years !!
Just put a zero on the bank. The underlying pipe, oil, gas and power is obviously worth far more than the current price indicates. What are the extreme negatives with realistic probabilities of occurrence?
Lbastie64 profile picture
sorry, Gazprom is work 3.5T, so without neft, 2.1T or $35B. For comparison, SNAPCHAT is work $15B and TESLA $50B...

If someone could tell us how much are worth Gazprom Bank and other large assets, that would be nice!
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