The Intrinsic Value of Gazprom.

Di Preston Pysh

Gazprom is a Russian based global energy company whose integrated operations include exploration, production, transportation, storage, processing and sale of gas and oil. The company is also engaged in the sale of vehicle fuel and the generation and marketing of both heat and electric power. Gazprom is amongst the top four oil producers in Russia and is the country’s only producer/exporter of liquified natural gas (LNG). The company’s stock has seen a large decline in price over recent years thanks to both the bear market in energy commodities and political turmoil surrounding its sphere of operations. From a high of around $17 in 2011 the stock now trades at around $4.20. Below is an assessment of whether this lower price is a value to investors.

Gazprom is classed as a cyclical company since the value of its assets, and thus its revenue and earnings performance, are tied to the ebb and flow of the wider cycles present in commodities, credit and business cycles. As such, consideration of this fact must be borne in mind when conducting a calculation of intrinsic value. Below is a chart depicting Gazprom’s free cash flow for the last 10 years.

As one can see the trend in free cash flow has been extremely erratic dropping significantly after the 2008 financial crisis before rising and then falling dramatically again as commodity prices have declined over the past few years. Due to this high volatility in earnings, it is extremely difficult to make reasonable forecasts of future earnings which is the basis for the discounted cash flow method of valuation, not only that but the increased risk associated with investing in cyclical companies requires a corresponding increase in the discount rate which further complicates matters. For these reasons, the discounted cash flow method might not be suitable in this instance.

Another tool for assessing the value of Gazprom is the comparable method, which uses ratios from a given industry, peer group or similar companies to estimate a company’s value. Below is a table listing several commonly used metrics when valuing cyclical companies.

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