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The Greatest Contrarian Call in the Oilpatch Today

Here’s a GREAT oil and gas stock: It has

  • A pristine balance sheet
  • An ultra-safe 5% dividend yield (represents only a 15% payout ratio)
  • A price to earnings ratio of only 2.5 times

Sound too good to be true? But it does exist. Just not in North America.

The company I’m talking about is Russian energy behemoth Gazprom (OTC:OGZPY). Like most Russian stocks the Gazprom story is complicated.

Gazprom isn’t just valued on economics—it’s a proxy for the Russian President Vladimir Putin. Entities controlled by the Russian Government own more than 50% of Gazprom.

“It’s the ultimate geopolitical contrarian speculation, and a very interesting speculation if you want to hedge on Russia expansing its global reach and power,” says Marin Katusa, Chief Energy Strategist at Casey Research and the author of a new book, THE COLDER WAR: How the Global Energy Trade Slipped from America’s Grasp, which will be published by Wiley in November.

Today, everything about investing in Russia is as scary as it has ever been. The country may or may not be on the verge of an all out war with the Ukraine, and its companies are now the target of aggressive American led sanctions.

And that’s why The Market Vectors Russian ETF (NYSE: RSX) currently trades at less than 5 times earnings. That isn’t one stock trading at less than 5 times earnings; that is the entire index of Russian stocks.

By comparison, the PE ratio for the S&P 500 is 19—almost four times higher than what companies trade for on the Russian exchange.

There is absolutely no doubt that Russian stocks should trade a discount, the country is full of corruption. Valuations that are only 25% of the United States though might be too extreme.

Katusa stresses he is not long Gazprom. But he says there are several factors that could cause Gazprom’s valuation to rise:

1. Ukraine peace

2. A cold winter

3. Russia/China announce the 30 year natural gas deal that is in yuan and ruble (i.e. non-US Dollar)

4. LNG success in Russia, and Katusa pointed to the fact that the giant French energy company TOTAL announced $27 Billion raise in non-USD to move forward with the LNG project in Russia.

5. The South Stream pipeline—designed to carry Russian gas to Europe but bypass Ukraine–gets built and starts flowing.

“Ironically, if something happened to Putin, GAZPROM would also rise in valuation,” adds Katusa, “as foreigners would speculate the company would work closer with Western powers–if that makes sense.

“And a new US president in two years could pull away from the failed US foreign policy and that alone could help Gazprom.”

Gazprom is a key supplier of natural gas for virtually every European country. For several countries, Gazprom is the only source of natural gas. Katusa says Gazprom earns 25% of its revenue from Germany.

gazprom

 

Source of image: Morgan Stanley

This is an important company that is not going anywhere and will not be “sanctioned” out of business.

How big is Gazprom? To give you an idea, consider that its peer group isn’t so much other oil and gas producers as it is entire nations that are part of OPEC.

Gazprom is one of the largest producers of energy in the world. In fact it is the single largest producer of natural gas on the entire planet.

In 2013 Forbes listed the largest energy producing (oil and natural gas combined) companies as being:

  1. Saudi Aramco – 12.7 million boe/day
  2. Gazprom – 8.3 million boe/day
  3. National Iranian Oil Company – 6.1 million boe/day
  4. Exxon Mobil – 5.3 million boe/day
  5. Rosneft – 4.6 million boe/day

Gazprom is 56% larger than Exxon Mobil and if it was a member of OPEC, Gazprom would be ranked number two !

A comparison with Exxon Mobil can help to more fully appreciate just how inexpensive Gazprom’s stock is.

In 2013, Gazprom’s production of 8.3 million boe/d was actually significantly higher than Exxon’s 5.3 million boe/d. But because Exxon has a higher oil weighting (oil production being more valuable), the two companies had virtually identical earnings of $32 billion.

Gazprom’s enterprise value (debt plus market cap) is roughly $130 billion. Exxon meanwhile with the exact same amount of earnings recently sported an enterprise value of $440 billion.

If Gazprom were an American company it would almost certainly be sporting a share price of more than three times where it trades today.

For investors who have a contrarian mindset, Russia and Gazprom specifically may be of interest. However–call me suspicious, but I’m not sure Mr. Putin would make for the most trustworthy of partners.

Even if the Ukraine situation calms down we have again been reminded of what a Putin-led Russia is capable of.

Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family was originally credited with saying that “The time to buy is when there’s blood in the streets.”

Rothschild spoke from experience. He made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon.

Rothschild was a contrarian. For investors with a similar desire to be contrarian, Russia is certainly a place to look today.

+Keith Schaefer



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