March 2, 2022
S&P 500 4,396
10-Year Treasury 1.87%
Gazprom (OGZPY) $2.06
Dear Clients and friends,
Gazprom (OGZPY) Update:
I am sorry I did not anticipate this decimation of Gazprom as a stock. I am hoping, but do not promise that their impairment issues are not permanent. Of course, hope is not a strategy. I am very much in touch with the situation and made a conscious decision not to sell. In retrospect I should have sold, but no human has the luxury of pushing back time. The invasion by Putin is horrible. The scale of the invasion was terribly surprising to me, as is the apparent and wonderful unity of the Ukrainian people to fight against such an invasion. We of course support Ukraine!
Gazprom (OGZPY) hit a 52-week high of $10.72 on October 5, 2021, and a 52-week low of $2.00 on March 2, 2022 (today). Our portfolios through yesterday were down (9.6%) year to date. The S&P 500 through yesterday was also down (9.6%) year to date. Gazprom is no longer our largest position, only because of price deterioration. As of March 1, 2022, Gazprom was 3.92% of our total portfolio, was down 69.6% year to date, and our average cost is $5.00. Not all of our portfolios are the same, so some clients may have greater or lesser year to date losses and/or allocations.
Russia has been undergoing a successful 20-year integration into the global markets. Putin and his actions seem to be destroying all that was built. Over the past few early mornings, Gazprom has traded and been priced near zero on the London Stock Exchange (LSE). The Moscow Stock Exchange (MOEX) has been closed since the invasion began. Gazprom (OGZPY) closed at $2.06 today. Volatility has been staggering.
The company was financially strong until this event. The lack of liquidity, funding, collection of revenues, could be devastating to any company. Gazprom carries investment grade credit ratings by all rating agencies. Moody’s which upgraded the debt to Baa2 (middle rung of several years ago, has the company under review, effective today.
Gazprom, being the largest gas and oil company in the world will most probably, exist for a very long time. The question is will they exist under their current structure, or will they wipe out their current shareholders, and start fresh? Gazprom recently announced a future gas pipeline from Russia to China. It also has completed the currently controversial and not yet operational, Nord Stream 2 pipeline. Russia supplies ~40% of all gas to Europe. Europe is working on other means to get their energy, and the winter will soon turn to spring, so Europe does have some time on their side. Europe could resort to liquid natural gas (LNG), gas from other local providers, such as Romania, Algeria, and Norway, coal and nuclear as well (both of which are being phased out, and the phase out would have to be delayed.) Yet, the ease, cost and abundance of Russian gas is something that would be needed for a purely efficient European infrastructure.
The reason I started investing in Gazprom during 2014, was we were getting a solid company at a bargain price. You had a financially healthy company, with predictable and recurring cash flows, being priced for distress. The dividend has often, if not always been over 4% since we owned it. Our cost basis was $4.99, as of December 31, 2021. Yet, the world changed dramatically with the invasion of Ukraine by Russia. The sanctions make it quite difficult for a company to operate their business. Gazprom is currently excluded from the sanctions because they are an energy company. Of course, that could change quickly, and sanctions could be changed to include Russian energy majors. We have never been in this situation, and the world changed quickly. The question remains, “Can Gazprom withstand the sanctions, a war, etc.?” I have no answer to that. Gazprom was our largest gainer in 2021, now by far it is currently our largest loser in 2022. My plan is to hold tight. If I saw the company was clearly not going to exist for shareholders, of course I would sell. Yet, I don’t think I would ever see that prior to its occurrence. Hence, we are in come hell or highwater.
I always try to invert our investment thesis. One of these methods is called “SWOT analysis (Strengths, Weaknesses, Opportunities and Threats.”) The threat I always thought of would-be Putin eliminating the company. I found that to be a low-risk threat, as Russia owns ~50% of Gazprom. What I never anticipated was essentially most of the world, shutting off all business and means of business with any Russian company. Of course, there is also the ethical debate of ownership. I have been studying Russia and Putin since 2014 (8 years). I obviously misjudged Putin, as I never thought he would go this far. I often think of why we own a company that is ~50% owned by Russia, but then I think, they have tens of thousands of employees, and like everywhere else, most of those employees are most probably, good hard-working people. They just happen to be Russian. I was expecting earnings of ~$3.40 for F2022, and ~$3.10 for F2023. A price earnings ratio (P/E) of < 1 is mind staggering.
Gazprom does have $1.3 billion in debt coming due on March 6, 2022 (This coming Monday). According to a Bloomberg article, it is their understanding, the funds were wired on February 28th, and are expected to be released on March 4, 2022. Bloomberg also indicated the company has a nominal coupon payment due on March 5, 2022, on a Swiss Franc debt, and that too is expected to be paid. Gazprom debt is being priced for distress, at $0.65 cents. Longer term bonds (2034), were being priced at $0.31 cents this morning. The concern of the bond payments amongst bond experts, is that the company will do what Putin tells them to do. Well, that really stinks! But it is what it is.
There has also been much news of major oil and gas companies, such as BP and Shell, selling off their Russian assets. I can’t figure out how they will do that, and who would buy them at this point. Perhaps once the investments are sellable, it will be a different world, and in theory, they might decide to keep their Russian investment.
It is important for investors to understand, Gazprom can certainly go to zero and wipe out the shareholders. I repeat, the price is so inexpensive, that I do not plan on selling. At these prices, it is almost like we have an option on their survival.
Again, we fully stand by the country and the people of Ukraine.
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REDFIELD, BLONSKY & STARINSKY, LLC
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