E Ruskaya Dusha

In reply to readers keen on an audacious move into Russia, I do not have a Russaya Dusha. There are good reasons not to buy into Gazprom over its deal with China to develop new gasfields in eastern Siberia. Gazprom OAO ADRs which trade here as OGZPY sound like a great buy: the stock yields 4% and trades at a luscious looking trailing price-earnings ratio of 3x. The company is obscenely profitable, with an 83% reported gross margin and a 22%+ net profit margin. It sales are growing 10% a year.

What’s not to like about this huge gas producer whose total market capitalization is less than $100 bn, less than a quarter the valuation of Exxon Mobil which produces less energy at higher costs and yields a third less in dividends. XON’s p/e ratio is 13.6.

I am not avoiding OGZPY because its CEO Alexei Miller is putting the screws on Ukraine by demanding prepayment for its gas supplies, or because he is a pal of Putin’s, although both would be arguments against the share. My boycott is because of how Gazprom’s latest move, a huge $400 bn 30-year contract with China National Petroleum Corp was negotiated and sealed. OGZPY CEO Alexei Miller called the price per cubic meter (cu m) of the Chinese contract “a commercial secret”. Today, however, the Russian energy minister, Alexander Novak, told Russian State TV that the contracted price being charged China was “close to $350 per thousand cu m,” (according to Dow Jones) but that it “is tied to the oil product basket and may be different each time.” Watch that oil basket, please.

Today Vladimir Putin announced that “at the agreed price and volume, the investment required for the project would pay off.”

The two companies then quickly announced that they would work together in two oil and gas blocks offshore Tanzania. Gazprom hinted that it would seek a listing in Singapore. Gazprom wants to show the world that it is not dependent on its deliveries via the trans-Ukraine pipeline to western Europe. It is a global player.

Moreover, in yet another speech today, CEO Miller said that “Gazprom was, is, and will remain the No. 1 supplier to Europe.” He added, at an economic forum in St. Petersburg boycotted by many companies and officials, that Gazprom is “ready to send as much gas to Europe as the market needs.” Miller is trying to make sure that the European offtake of Gazprom gas, which accounts for a third of its total consumption, will continue despite fears that it will, once again, cut supplies going through Ukraine.

European utilities are adding gas liquefaction capacity to reduce dependence on Gazprom. Distant plans would add supplies of cheap US shale gas to what is going from the Middle East to western Europe. Even Israel is selling natural gas to Europe under a deal with Fenosa of Spain. China may take over as a customer, but that will be expensive and take years.

My Kremlinologist instincts were aroused by the news blitz. One thing I am sure of is that developing two new gasfields in eastern Siberia to supply China from will be costly to Gazprom. While very profitable, OGZPY is used as a cash cow by the Russian government.