Seeking Alpha, NY: Gazprom: World’s Greatest Energy Company?

Posted on Jan 17th, 2007 with stocks: OGZPY.PK, RDS.A

Kurt Wulff (McDep Associates) submits: Buy-recommended Gazprom (OGZPY.PK)’s sales of natural gas are as large as Saudi Arabia’s sales of crude oil in heating equivalent, and superior in environmental quality. Yet Gazprom’s selling price at about $2.50 a million btu is only about one-fourth of Saudi Arabia’s at some $60 a barrel, or $10 a million btu.

In view of that price chasm one can hardly fault Russian President Putin for attempting to secure market value for a precious resource. Yet, Russia, unlike Saudi Arabia, offers ordinary investors, as well as anyone who objects to a nearer-to-market price for clean energy, the opportunity to participate in the producer profit by owning shares of what may become the “World’s Greatest Energy Company.”

Meanwhile, results for the second quarter of 2006, reported according to international financial standards on December 21, confirm a modest one-third increase in natural gas price over the previous year. With continued progress there would be justification for upward revisions in estimated net present value, currently at $56 a share, that amount to a modest multiple of current cash flow from a low natural gas price.

Energy a Political Tool?

How can consumers justify paying Gazprom, the world’s largest natural gas producer, $2.50 a million btu for clean fuel while paying Saudi Arabia, the world’s largest oil producer, $10 a million btu for medium dirty fuel? Because the gap between realized price and market price for Russian natural gas is so wide that we have little sympathy with the argument that energy is being used as a political tool.

Instead, President Putin’s great contribution to his countrymen may be to recognize the value of Russia’s energy resources and to take actions to realize that value for Russians rather than to give it away cheap. We believe that consumers are also better off in the long run if energy sells at a market price that takes into account environmental characteristics.

The choice we make when we recommend Gazprom is driven by resource value and concentration on the cleanest fuel. Political risk is there, but it needs to be put in a balanced perspective.

The World’s Greatest Energy Company designation applies to Gazprom today only in the size of its clean fuel resources. The company is not there yet on a commodity market price basis, in operating efficiency, in transparency of financial results or in stock market value. The future price of freely traded Gazprom stock may be the most credible measure of the success of Russia in managing its clean energy asset for home and global benefit. In view of the great potential, investors can be patient.

Sakhalin II Project Agreement Reached

At the same time Gazprom announced second quarter earnings, buy-recommended Royal Dutch Shell (RDS.A) announced that it and its partners had reached agreement to sell a half interest in the Far Eastern oil and liquefied natural gas project, Sakhalin II, to Gazprom for $7.5 billion. The deal resolves a dispute with the Russian government over a doubling of the estimated cost of the project to $20 billion. It looks like the price covers a half share of the costs incurred so far and we presume Gazprom will pay its share of costs not yet incurred.

We don’t like seeing that Shell has to give up half of its upside. Yet the effect is not a lot different than when Norway some thirty years ago raised its incremental tax rate on oil to near 80% and required that the state oil company be a partner in new deals. The net result of today’s Sakhalin announcement for investors is the transfer of some possible future reward from publicly held Shell to half publicly held Gazprom.

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