（Michael Li (UCL), Olivia Pote)
18th July 2020
Closing Price: $22.29
Year Range: $15.01 – $38.49
Market Cap: $21.0328 Billion
Current Price: Undervalued
Natural gas prices have fallen sharply since the start of the pandemic in February due to weak commercial demand resulting from lockdown measures. Gazprom’s average selling price has declined by 36% as its key markets, Europe and China, have closed all non-essential businesses the past few months and implemented stay at home orders (Foy 2020). Moreover, heating demands this past winter has been weaker than usual due to it being the hottest winter in Europe to date (Carrington 2020). This has further exacerbated the impact of the pandemic on natural gas inventories, pushing them towards the upper range of the five-year average benchmark.
However, as the trend for warmer weather continues in Europe with heat-waves resulting in temperatures of 30-40 degrees Celsius, demand for cooling is expected to be strong over the subsequent months (Al Jazeera 2020). Given that natural gas is the primary source of electricity generation for cooling this should exert downward pressure on gas inventories (QuandaryFX). Increased demand for cooling coupled with anticipated declines in production as natural gas suppliers have been reducing rig counts the past few months should create upward pressure on gas prices (Quandary FX).
It is unlikely commercial and household demand for gas will fully recover this year even as countries gradually lift lockdown measures, since some companies have shut permanently and others have shifted to work from home. Consequently, Gazprom’s revenue for the next two quarters will likely continue to be poor relative to previous years. However, this appears to be a critical juncture for natural gas prices as over the past few weeks gas inventories have started to move away from the upper bound of the five-year range, suggesting a potential turnaround (QuadaryFX).
The situation on the European gas market is abysmal, with prices and volumes both off sharply,” Mr Smith said in a note to clients. “In short, the second and third quarters of 2020 will probably be the worst quarters for Gazprom’s European gas export revenue in over 15 years.” However, as a form of transitional energy natural gas should be well positioned to capitalise on the trend away from other fossil fuels.
Valuation (Relative EBITDA multiples, Price/Equity)
|Earnings Yield %||12.62||21.30||21.81||19.84||18.64||18.51|
|Enterprise Value (Bil)||27.31||30.73||31.50||39.85||29.24||29.24|
|Earnings Yield %||-3.22||2.81||6.81||3.72||-4.22||0.40|
|Enterprise Value (Bil)||155.34||179.12||164.34||181.67||138.97||160.10|
|Earnings Yield %||-0.34||-5.53||3.69||-3.50||-47.09||-2.58|
|Enterprise Value (Bil)||14.95||15.22||14.11||16.99||12.16||13.90|
Average Current EV/EBITDA: 6.05
Median Current EV/EBITDA: 7.56
The EBITDA multiple (EV/EBITDA) shows the ratio between the enterprise value (total market capitalisation + total debt – cash and cash equivalents) and the EBITDA (Earnings before interest, taxes, depreciation and amortization). The current EV/EBITDA multiple for Gazprom is lower than both the average and median values for Gazprom and its closest competitors in the industry at 2.88 compared to 6.05 and 7.56 respectively. This indicates that Gazprom is significantly undervalued as it earns more per unit of enterprise value than its competitors, thus allowing us to label Gazprom as Significantly Undervalued and issue a BUY rating for OTCMKTS:GZPFY.
QuandaryFX. 2020. GAZ: It is Time to Buy Natural Gas. [online]. Seeking Alpha. Available at: https://seekingalpha.com/article/4358485-gaz-is-time-to-buy-natural-gas. [Accessed 15 Jul 2020].
Foy, H. 2020 Gazprom plunges to first loss since 2015 as Europe gas demand tumbles. [online]. London: The Financial Times LTD. Available at: https://www.ft.com/content/ffa48632-7456-4adf-8be1-786ae35b3394. [Accessed 15 Jul 2020].
Carrington, D. 2020 This winter in Europe was hottest on record by far, say scientists. [online]. London: The Guardian. Available from: https://www.theguardian.com/environment/2020/mar/05/truly-extreme-winter-2019-20-in-europe-by-far-hottest-on-record. [Accessed 15 Jul 2020].
Aljazeera. 2020 Europe sizzles in post-lockdown heatwave. [online]. Al Jazeera Media Network. Available from:https://www.aljazeera.com/news/2020/06/europe-sizzles-post-lockdown-heatwave-200626091923306.html. [Accessed 15 Jul 2020].