Gamble of the week: Russian gas giant

This ‘Gamble of the week’ column is all about trying to identify cheap shares of depressed companies that can recover. There’s always a fine line between getting this right and buying a duff business that deserves to be cheap.

Then there are the types of business that look cheap because no one really trusts them. This is probably the case with this Russian gas giant.

It is the largest producer of natural gas in the world and the supplier of around 30% of Europe’s gas needs. It also has a tendency to be used as a political tool by the Russian government to force neighbouring states to behave themselves, as we can see with the case of Ukraine just now. This is a good enough reason for many people to stay clear of the shares.

Gazprom (LSE: OGZD)

Gazprom share price chartThat’s understandable, but a look at the hard facts says that Gazprom is very cheap indeed. It trades on just 2.3 times expected earnings. Put another way, it offers an earnings yield (one divided by 2.3) of 43.5%. It has a dividend yield of 6.3%. This looks too good to be true, so what’s the catch?

Maybe there isn’t one. I mean, surely a 43.5% earnings yield is enough to compensate most investors for the risk involved.

Bulls point out that the last time Gazprom shares were this cheap was at the time of the financial crisis. They then went on to be valued at over ten times earnings after soaring in value. Some reckon that the same can happen again.

It could do, but perhaps the latest goings on in Ukraine will force some countries to speed up their search for more secure sources of gas even if they end up being more expensive. Poland is looking into bringing in liquefied natural gas (LNG), with countries in the Middle East and America looking for customers for their supplies.

Back in Russia, Rosneft (of which BP owns just under 20%) is challenging Gazprom’s monopoly on exporting gas. The end of this could make it harder for Gazprom to make more money. Although it could always look to countries such as China to buy its gas.

Yes, Gazprom looks very cheap and despite the risks (politics, currency and competition) is probably worth a punt. The shares can be bought on the London Stock Exchange and are priced in dollars. They should be fairly easy to trade most of the time although maybe less so after 3pm (when the Moscow stock exchange closes).

Verdict: risky punt


Merryn

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