I have never experienced a temperature swing of such proportions. Last Monday afternoon in Manhattan it was 50ºF, but on Tuesday it was 5ºF (a record low), making it literally difficult to breathe on walks longer than several blocks.
So, while walking the streets, I wondered what they do in Canada and Russia – closer to the North Pole. Out of curiosity, I looked up the temperature in the northernmost year-round inhabited place – Khatanga, in northern Siberia. I checked their temperature on a weather app on my iPhone. It was -45ºF, with the temperature staying between -48ºF and -31ºF all week. Sadly, it’s likely to get even colder soon. This annual chart shows that their lowest annual temperatures come in February:
Source: weatherspark.com, Average Weather for Khatanga
My next thought turned to energy stock investments. I thought of all that oil in Siberia, which ExxonMobil (XOM) is supposed to help Rosneft (RNFTF) produce. Oil is not going to come easily out of the ground at these temperatures. While Russia is the third largest producer of oil, it is the second largest exporter in the world after Saudi Arabia, since Russia’s economy is simply not large enough to use all of its oil.
The problem with Russia’s oil reserves is that a lot of them are in Siberia, and the Russians don’t have the required technology to extract them. This is why Exxon Mobil has moved to help Rosneft. Production will likely start in 2014. Rosneft has the largest oil reserves of any publicly-traded oil company, as well as the largest production, at 5% of the world’s total, even though it is 69.5% owned by the Russian state. Exxon is the largest oil company by market size – and probably the most advanced in technology.
Russian Energy Companies are Remarkably Cheap
Russian energy companies are some of the cheapest in the world. The problem is that they tend to stay cheap. In Rosneft’s case, the large state ownership position limits the float of shares. Rosneft trades at 7.3 times earnings and 0.9 times book value. It has had a policy of increasing its dividends, even though they are a bit more erratic than the more “even” payouts that US investors are accustomed to receiving.
In that regard, Rosneft is similar to Gazprom (OGZPY), which is also majority-owned by the Russian state. It is the world’s largest natural gas producer, trading at a P/E of just 2.4 and price to book of 0.34. I do not remember any large company, Russian or otherwise, which has suffered from such a consistently-depressed valuation for years. I guess it can become even cheaper, but this valuation is too low, because Gazprom grows and it is exposed to long-term contracts, not spot pricing. There isn’t any competitor on the scale of Gazprom that can challenge its dominance. Sure, there all kinds of pipelines that circumvent Russia and try to challenge it, but in the end they are small potatoes compared to Gazprom.
Source: Yahoo Finance
It is surreal to see how depressed Russian shares are, in general. They are still underwater since 2007, as measured by the Market Vectors Russia ETF (RSX) – charted above vs. the S&P 500 ETF (SPY). The Russian economy has grown significantly since then, and so have the earnings and revenues of the mainstream Russian companies.
One plan to combat the slumping share prices is a directive that came directly from Russian President Vladimir Putin for state-owned companies to pay dividends in the amount of 25 % of annual net income, thus boosting their appeal to investors at times of low global interest rates. The plan, if it works, would re-energize share prices even though adoption of the directive has been slow. Gazprom, for example, says that it will be difficult to comply, as they need the money for investments
How Does Exxon Compare to Russian Energy Companies?
ExxonMobil, on the other hand, has the money for dividends but it does not pay out very much. Don’t get me wrong. Exxon has been the largest dividend payer in the S&P 500 for years, based on the total amount of dividends paid, which was $10.717 billion as of the end of 3Q, with a payout ratio of 22.5%. Exxon is sitting on the second largest cash pile in the S&P 500—the first being Apple (AAPL).
Looking at Exxon’s latest quarterly balance sheet, one has to net out inventory and receivables and add in long-term investments in financial instruments to get to $48.254 billion in liquid assets. Still, with a small payout ratio and that much cash, the dividend yield is only 2.5%.
Why so low, if Exxon can easily double it? Exxon has had flat-to-declining production in the past couple of years, which requires the company to go to the Russian Arctic in search of reserves. There is a lot of oil in the world, but in hard-to-get places, which means that Exxon’s payout is unlikely to be rising any time soon, as management is trying to acquire new reserves.
Source: Yahoo Finance
One thing you have to remember about Exxon is that, as an equity investment, it is considered super-defensive. That does not mean it cannot go down – any stock can – but it means that in bear markets, with the same conservative management and a large cash position, it tends to go down less, while in bull markets it tends to go up less. There were days and weeks during the infamous 2008 stock market crash when Exxon rose while the rest of the market was going down. The shares have lagged since the March 2009 stock market bottom, but have massively outperformed since 2000, through two nasty bear markets.
Written by Ivan Martchev