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Gazprom Dividends Unlock Value for Shareholders

Keep an eye on this undervalued giant in the energy sector

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I typically invest in your usual dividend growth stock that boasts a long record of consistent dividend increases. Long term readers know that I also own index funds in a 401k ( like millions of others in the USA) but also do merger arbitrage and sell options. Sometimes however, I uncover assets which I find to be deeply undervalued with the potential to return several times the original invested value.

One such company is Gazprom (OGZPY). Below you could find the business description of the company:

OAO Gazprom, together with its subsidiaries, engages in the exploration and production of oil and gas. It produces crude oil and gas condensate. The company also engages in the storage, transportation, and sale of gas; and processing of oil, gas condensate, and other hydrocarbons, as well as sale of refined products. In addition, it is involved in the generation and sale of electric and heat energy. The company serves customers in Baltic, Commonwealth of Independent States, the United States, the Asia-Pacific, and Europe, as well as exports to approximately 30 countries.

Currently, the company is selling at 4.80 times earnings. This shows you that either Mr. Market does not believe earnings are sustainable, or that Mr. Market is simply being irrational today. I purchased the stock in June 2013.

I believe that Mr Market is being irrational about the company. First of all, Russia went from being touted as the next big thing during the BRIC boom which ended in 2008, to being one of the most undervalued markets in the world, as measured by P/E ratio. Currently, shares are trading at the same levels they did at the depths of the financial crisis.

Some of the fears behind Russia are corruption and a perceived lack of transparency. Corruption is an issue, although it has been going on for the past 23 years. Investors who bid up Russian stocks in 2008 knew about it, but did their speculation anyway. It speaks greatly that a company like Gazprom, which is surrounded by tales of corruption, is still able to earn a very good profit every year.

Based on the latest 2012 figures, the company seems to have been able to replace production with new reserves. However, the warning sign is that production of carbons has been declining since reaching a high point in 2006.

High oil and gas prices have led to rapid increases in revenues and profits over the past decade. All figures are in Russian Roubles, with $1 buying approximately 33 roubles.

If you look at the earnings per share side of the equation, it looks like profits are mostly staying above 14 RUR per share. The profit of 7.31 per share in 2008 was an aberration due to the financial crisis.  Even if profits were to further drop to 15 RUR per share and stay there indefinitely, the stock is still undervalued at 7.50 times earnings.

Gazprom owns 72% of Russian gas reserves, and supplies 70% of natural gas in the country. The problem is that Gazprom sells gas in Russia at about 3 times the amount it is selling it in Europe or the countries in the Former Soviet Union. Gazprom is also one of the largest suppliers of natural gas to the European market, with a 25% share.

In recent years, the company has faced increased competition from Norway. However, given the company’s infrastructure and long-term relationships with gas providers in so many countries, it is highly unlikely that the amount of natural gas it would sell abroad simply drops precipitously. In addition, while sales in Europe have been flat, prices have been increasing, thus resulting in higher revenues.

Article printed from InvestorPlace Media,

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