MOSCOW. October 17 (RIA Novosti political commentator Peter Lavelle) - Russia's oil and natural gas giant is set to have its traded shares liberalized.
Abolishing what is known as the "ring fence" is expected to dramatically increase the company's liquidity and boost capitalization. Gazprom stock, long known to be investor-adverse, could soon become one of the most sought after equities on international bourses.
A 1997 presidential resolution barred foreign-controlled firms from owning Gazprom shares traded on Russian exchanges. The decree capped foreign ownership of Gazprom shares to 20%, and limited this to American Depository Shares (ADS) traded in London and New York. Gazprom ADS's trade at a higher price than local common shares, and make up a paltry 3% of the company's current non-local traded free float. Market estimates suggest that as much of 10% of Gazprom shares are owned by foreign entities through "gray schemes", grudgingly tolerated by the government and Gazprom. All of the above is about to dramatically change.
Through the share liberalization plan, up to 49% of Gazprom shares will be publicly traded with no restrictions - the government will retain its recently-acquired majority control of the company. The liberalization of Gazprom's shares will be nothing less than Russia's own investment "big bang". Holding 20% of the world's gas reserves, producing 85% of Russia's gas and 16% of global output, supplying a quarter of the western European market, and, importantly, accounting for up to 25% of federal tax receipts, Gazprom is an extremely attractive investment target - it could not be otherwise.
Share liberalization will result in a huge increase in demand for the company's stock, and Gazprom will become Russia's biggest company by market capitalization. It could even become the second most liquid emerging-market stock, after South Korea's Samsung Electronics, and very close to PetroChina.
With a current market capitalization of $124 billion, Gazprom is priced much lower that its vast reserves of 114 billion barrels of oil equivalent would suggest. Judging by its international peers, in term of prices and reserves, Gazprom's market capitalization should be in the region of $300 billion.
Investors know this, and will aim to profit from Gazprom's current low valuation. A few examples suggest the kind of upside investors are looking for: the shares of Russia's largest oil producer Lukoil trade at $2.40 per barrel of reserves, and Sibneft traded at $3.13 per barrel before Gazprom announced its intention to buy a super-majority stake in the company; China paid about $10.60 per barrel with its purchase of PetroKazakhstan, and Western oil majors are priced at between $16 and $18 per barrel of reserves. For Gazprom, the current cost of oil equivalent is $1.09 per barrel.
Investors are very likely to profit from buying Gazprom shares, but the company's management (i.e. the state) faces a number of challenges to sustain investor interest and enhance the less-than-efficient current bottom-line.
Gazprom is a company in a hurry, and with enormous ambitions. It plans to become the world's biggest oil and gas producer within five years, and is slated to expand both upstream and downstream, and into related sectors such as electricity generation, at home and abroad. This goal is entirely plausible, but Gazprom will have to match ambition with internal reform.
Gazprom's production record in recent years is anything but impressive. In 2004, output was at the same level as in 1999; during the same period, other major oil companies raised output by 50%. Gazprom's output did increase by 1.9% in 2002 and 3.5% in 2003, but in 2004 output growth was only 0.9%. Moreover, the lion's share of this output increase is attributed to registered affiliates and non-core companies.
Gazprom will have to address long-standing issues such as mismanagement, nepotism, and an overbearing Soviet-style bureaucracy. The company's non-energy assets, ranging from Russia's largest media business and mining interests, to yacht clubs and hunting lodges, bother investors. Such assets are deemed a distraction from what Gazprom should be doing - creating value based on its core assets, and a profitable return on investment.
Russia's most important company is opening up to the world, and it is very much being welcomed. Russia also has the opportunity to offer itself and the world a 'big bang' that firmly integrates itself into international financial institutions. Whether this 'big bang' will result in value-building, or a world-historic fizzle, depends on Gazprom's management and the Kremlin.
The opinions expressed in this article are those of the author and do not necessarily represent the opinions of the editorial board.
