Investors See “Gazprom” at the Bottom

July 26, 2013
Alexei Miller, CEO of Gazprom Photo: RIA Novosti

“Our everything” is rapidly melting away, so far at least in the eyes of potential investors in the shares of the largest Russian company. According to the 2013 Financial Times Global 500 rating issued yesterday, Gazprom took 57th place after sliding down by 26 notches in just one year. It is no longer one of the 50 largest companies in the world. The rating was based on the capitalization numbers for the company as of March 28th, while by April 2nd Gazprom’s value went down even further: its market capitalization fell below $100 billion and still remains at this unattractive level. But there were times when the management of the corporation was seriously eyeing the top spot with a valuation of $1 trillion.

In that list that evaluates global corporations in terms of capitalization, the Russian gas monopoly ended up between Walt Disney and McDonald’s. Quite respectable neighbors, but not for such a giant, as Gazprom.

The most expensive global corporation, according to the FT Global 500, is Apple, with a capitalization of $415.7 billion. Exxon-Mobil came second, just like a year earlier, with $403.7 billion.

In another recently published ranking, Fortune Global 500, where companies are ranked by the annual revenue, Gazprom has also sunk. It took 21th place, compared to 16th place the year before. The first three places in the Fortune rating are taken by the British-Dutch Royal Dutch Shell, Wal-Mart, and Exxon-Mobil.

Meanwhile, it would seem that just recently the Gazprom management projected the kind of optimism that would make you even wonder why the Russians still do not live under communism. In 2008, when the global financial crisis was knocking at the door, the Russian authorities, and even more so the management of Gazprom, would just turn a blind eye to it. Moreover, there were promises of a possible gas price of $500 per 1 thousand cubic meters, while the capitalization of the producer was supposed to reach $1 trillion.

Then there was the crisis, which put everything in its place. In January 2011, responding to tough questions by Der Spiegel magazine, the president Alexei Miller tried to brave it out. “Two years ago you promised to bring the capitalization of Gazprom to $1 trillion and turn it into the largest company in the world,” a German correspondent reminded. “Instead, the market value of Gazprom has decreased from $300 billion to $130 billion. Does that mean that the golden age of Gazprom is over?” “The golden days are gone not for Gazprom, but for the financial capitalism, that is based exclusively on paper values,” retorted Miller. “We spoke about a trillion dollars capitalization back in spring of 2008, before the global financial crisis, when we lived in the system of coordinates of that paper-based financial capitalism. This system has discredited itself .”

Apparently, it’s not only the system of paper capitalism that discredited itself. Gazprom itself, in the eyes of investors, is now worth less than $100 billion, which is quite shocking considering that, according to Fortune estimates, Gazprom has received a respectable $38.1 billion in profits, that is more than the leader, Royal Dutch Shell, with its $26.6 billion. Above Gazprom are only Exxon-Mobil (44.9 billion) and Apple (41.7 billion). However, the experts interviewed by “NG” are not surprised by the rating data.

“The situation reflects the reluctance of investors to invest in the company in the long term. The reason is simple and clear: Gazprom is investing heavily in projects that never pay off,” argues Mikhail Krutikhin, a partner in RusEnergy Consulting. “The list can be quite long, but it’s enough to mention such projects as the construction of an LNG facility in Vladivostok, the development of deposits in Yakutia for prospective exports to China, the ‘South Stream,’ etc. Acting upon government direction, the corporation is investing in some insanely expensive and economically inefficient projects which will not help boosting the investors’ confidence over the coming years.”

Gregory Birg, co-director of the analytical department of the “Investkafe” agency, agrees. “These rankings are right on in terms of the gas monopol’sy stock values, that from the beginning of fall of 2012 went down by more than 35%. And even recouping some of the losses in the mid-summer of this year, many investors question the company’s ambiguous policy in regards of construction of gas pipelines to Europe, where the decision are made based on political considerations rather than on the basis of economic feasibility.”

In addition, he said, the situation was further aggravated by poor export performance in Europe. Gazprom is under pressure by the former LNG suppliers to the United States who have refocused on deliveries to the Old World once gas production in the United States had increased.

Domestic competitors do not sit tight, either. Against the background of falling sales by Gazprom, they managed to increase their share of the domestic natural gas market.

“Based on the disastrously low market capitalization relative to its assets, as well as the net profit level, it can be concluded that investors do not believe that the company’s managers are able to create shareholder value,” complains Birg.