I was looking at one of my favourite companies today and noticed a high probability setup when it comes to technical formations. Now, do not get me wrong, I do not just buy any company on technical setups like these, so a lot more thinking process comes into it.
For those who read my blog, they should already know I am very very bullish on commodities in the long run - secular bull market. Therefore, I am also bullish on commodity companies around the world, which stand at making large amounts of profit as commodity prices rise in the future. And we should all know that in the long run, it is earnings that drive prices. So lets get into a bit of a background on Gazprom thanks to Wikipedia:
Gazprom is the largest extractor of natural gas in the world and the largest Russian company. Gazprom was created in 1989 when the Ministry of Gas Industry of the Soviet Union transformed itself into a corporation, keeping all its assets intact. The company was later privatized in part, but currently the Russian government holds a controlling stake.In 2008, the company produced 549.7 billion cubic metres (BCM) of natural gas, amounting to 17% of the worldwide gas production. In addition, the company produced 32 million tons of oil and 10.9 million tons of gas condensate. Gazprom's activities accounted for 10% of Russia's gross domestic product in 2008.The major part of Gazprom's production fields are located around the Gulf of Ob in Yamalo-Nenets Autonomous Okrug in Western Siberia, while the Yamal Peninsula is expected to become the company's main gas producing region in the future. Gazprom possesses the largest gas transport system in the world, with 158,200 kilometres of gas trunk lines. Major new pipeline projects include Nord Stream and South Stream.The company possesses subsidiaries in many different industry sectors, including finance, media and aviation. In addition, it controls majority stakes in various companies. Gazprom is publicly traded at stock exchanges as RTS:GAZP, MICEX:GAZP, LSE: OGZD, FWB: GAZ and OTC:OGZPY.
Before I continue, I would like to state that I own this company already under the OGZD pink sheet traded on the LSE (London Stock Exchange).
Looking at the daily chart above we can see that the price of Gazprom is currently consolidating in a triangle. Triangle consolidations are one of my favourite ways to enter a trade / investment, because I see them a pressure points. In other words, a consolidation like the one above is where bulls make higher lows and bears make lower highs. Eventually the pressure builds and a decision point comes. When the price breaks into a certain direction, majority of the time it tends not to be a false break out.
On the weekly chart we can see that the price is currently siting above its previous resistance at $13 and also bouncing of its bullish trend line. When RSI goes very quite like it currently has, it usually means it is a period of low volatility and indecision. In other words, something big is about to happen.
Markets tend to move in cycles of high volatility and low volatility. Studies have shown that a period of high volatility usually signals the end of a trend. On the other hand, low volatility usually signals the calm before the storm or the calm before a breakout in the share price and the beginning of a new trend. Therefore, periods of high volatility are usually followed by a period of low volatility and periods of low volatility are usually followed by a period of high volatility.
One of the reasons I would be buying this break out and not selling is because Gazprom is still down 17% since its recent high in April at $17.50 and is also down 55% from its 2008 peak at $30.40! So therefore, there is still a lot of value here.
Another reason I would be a buyer rather than a seller is because Gazprom is influenced by Russian Natural Gas prices, which are currently depressed when compared to their 2008 lows. As already stated numerous times, it is my opinion that all commodities, not just energy commodity prices, will go much much higher due to Asian demand and limited supplies.
With the reduction of reliance of Coal, China is moving towards more cleaner types of energy. One of these is Natural Gas, and Gazprom is in the perfect position as well as location to deliver on this huge appetite. But this is obvious strong fundamental outlook in the long term, while we are looking at a potential trade in the short to medium term, which could turn into a whole new up trend for all we know.
With winter in the Northern Hemisphere around the corner (the Summer is more than half way through now), we should note that Gazprom sales and therefore revenue is about to pick up from customer all over the world, including Western Europe and certain parts of Asia.
Furthermore, Gazprom balance sheet is in a very pristine condition. Its Capex level stands at 88% of its operating cash-flow, while its operating cost per barrel of energy is the lowest of all Russian energy companies. Therefore, high capital expenditure creates growth, growth creates revenue, and low costs turn majority of the revenue into profits.
No matter how you value energy companies, Gazprom's valuation is remarkably cheap. The standard method of valuing any company is a P/E Ratio - price to earnings ratio. In terms of these financial multiples, Gazprom remains one of the cheapest stocks in the energy sector, with P/E ratio sitting at 4.5. This is much much cheaper than companies like CNOOC, PetroChina, Sasol, Petrobras and Rosneft - which are all great energy companies. However, energy companies can also be valued in terms of reserves. Here too, Gazprom is also one of the cheapest stock in the energy universe.
Mark Mobius, smartest of smart money, taught by the man himself John Templton, is also a huge owner of Gazprom. Mark is currently in-charge of Temploton Emerging Markets Fund managing $50 billion in assets. This is what he said last week in regards to his investment thesis:
"Russia is at the top of our investment list these days, resources companies and the oil companies in particular", Mobius said, speaking to Investment Week.
The manager of the $50bn Franklin Templeton Emerging Markets fund said companies such as miner Norilsk Nickel, financial institution Sberbank and natural gas giant Gazprom were particular favourites within his portfolios!
Buying value on cheap is a smart way to invest - that is for sure! So when we look at the valuation of the company, depressed price, technical setup in both daily and weekly time frames, large reserves / stockpiles, and great strategic location being next to Asia including China - it should not be a surprise that Mark Mobius, one of the greatest investors of our time, own a large position in Gazprom!