The Bovanenkovo gas field on the Yamal peninsula in the Arctic circle.
Alexander Nemenov/AFP/Getty Images
Talk about a rotation play. Russian state-owned natural gas giant Gazprom Neft has a miserable financial history. Its London-listed shares shrank by half in the decade preceding Jan. 1, 2021.
This year is different. Gazprom stock (ticker: OGZD.U.K.) has nearly doubled since April as prices in its core European Union market soared into the stratosphere and beyond.
The EU energy crunch may complicate politics for Gazprom’s ultimate boss, Russian President Vladimir Putin. For investors it has been a no-brainer. “As long as we’re seeing this huge spot price, people are buying Gazprom,” says Mitch Jennings, senior oil and gas analyst at Sova Capital in Moscow.
It’s tempting to think of Russia and Gazprom as the “Saudi Arabia of gas,” and assume they could ease the market if they wanted to. That would be tempting but not quite right. “Once oil is out of the ground, it can be shipped anywhere in the world for about a dollar a barrel,” says Ronald Smith, senior oil and gas analyst at Russia-based BCS Global Markets.
Gazprom’s output depends on mega-priced natural-gas pipelines to reach a particular customer. European buyers have been favoring liquefied natural gas and renewables in recent years; Gazprom has delayed new production for lack of orders.
“Gazprom has been clear that first they sell gas, then they produce it,” says Vitaly Yermakov, senior research fellow at the Oxford Institute for Energy Studies. “Now they simply can’t balance the European market singlehandedly.”
There is some suspense, however, around what happens once Gazprom fills up Russia’s own winter gas storage, which should happen over the next month.
Putin himself said on Oct. 6 that Russia should “think through the potential increase of supply on the market.” His energy minister hinted that would happen faster if Germany quickly approves the long-germinating Nord Stream 2 pipeline, which allows Russia to circumvent Ukraine for gas transit.
Nord Stream 2 is no quick fix, though. It might yield around 1% of EU consumption this season, Sova’s Jennings estimates.
All of which looks great for Gazprom’s bottom line. Prices should stay at $20 per billion British thermal units (MMBTU) in Europe this winter, up from $4 a year ago, BCS’ Smith projects, then subside to $7 by 2023.
The full force of today’s prices will hit Gazprom’s revenues only next year as half its contracts are linked to oil or gas markets with several months’ lag, Yermakov adds. “The prices Gazprom actually receives should increase in a very dramatic way in early 2022,” he says.
Another reason to like Gazprom is dividends, lots of dividends. After a protracted struggle, Russia’s finance ministry forced the company to pay 50% of net profit out to shareholders.
The Russian state itself is the largest of these shareholders, but private investors can still hitch a lucrative ride. With earnings rising even faster than the share price, Gazprom’s dividend yield could be north of 15% next year, figures Jacob Grapengiesser, a partner at East Capital. “The consensus is significantly underestimating gas prices,” he says.
The bad news for Russian markets is that the Kremlin will keep almost the whole gas windfall, through dividends and taxation, and save it, with little spillover to the struggling consumer economy.
“Russian consumer stocks have been absolute dogs this year,” Grapengiesser says.
That may be, but Gazprom’s moment may last a while.
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