Overall, Russia will supply China natural gas at about $10- $11 per million BTUs — after taking out several transportation calculations/fee waivers. Russia will ship this gas through an expanded 2500 mile pipeline network dubbed “The Power of Siberia” that connects several large Russian gas fields.
Aside from being a big win for Russia, the deal is also pretty big news for investors as well … unless you’re invested in the major U.S. coal stocks.
One Natural Gas Buy
The obvious winner in any sort of Chinese-Russian deal is state-backed natural gas giant Gazprom (OGZPY). The company has a virtual exporting monopoly on the fossil fuel and would be the main supplier and pipeline owner in this huge project. That fact could be a game changing occurrence for OGZPY shares.
As the China deal has languished and European demand fallen, Gazprom has gone nowhere, which has been reflected in the company’s stock price. OGZPY shares only managed to gain about 2% in 2013, while other energy stocks surged on the backs of higher energy prices. Meanwhile, QGZPY is currently trading for just a price-to-earnings ratio of 2.36 and price-to-book at 0.4. That actually makes Gazprom the single cheapest energy stock out there.
However, the China deal is the main catalyst that could finally propel Gazprom stock upwards. If it happens — which is becoming more likely every day — shares could finally realize their potential. If Gazprom where to trade at similar multiples to, say, Exxon (XOM), the share price could double.
Two Coal Stocks To Sell
Both have already felt the one-two punch of dwindling demand here at home coupled with rising environmental regulations. ACI stock fell nearly 38% last year, while BTU stock fell 275 in 2013. This is already on the backs of sharp declines in 2011 and 2012 for BTU and ACI stock — to tune of 71% and 81%, respectively.
However, those price drops could be just the beginning for the two coal stocks as the deal gets finalized and the countries begin piping gas.
Because ACI and BTU are the nation’s two largest coal stocks as well as two of the biggest suppliers to China, the deal could mean more losses for investors as the Asian Dragon replaces coal with Russian piped gas. ACI stock is especially vulnerable as it’s a far from easily accessible ports. BTU at least can shift some of its production in Australia towards India and other emerging Asian markets.
Investors are already beginning to worry, as even the hint of a potential deal sent shockwaves down the spines of both ACI BTU stock. Since the beginning of the year, the losses for both ACI and BTU stock have continued. China has become so much of their focus over the last two years that any in further drop demand could lights out at ACI and BTU.
For investors, playing the landmark deal is as easy as buying Gazprom and avoiding the U.S. coal stocks for now.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.