OK, there’s two statements that really caught the eye of Gumshoe readers in this latest teaser pitch from the Oxford Club — first, that they say it’s the “most profitable energy company in the world” … and second, that they say it will triple by the end of the year thanks to a “shocking announcement.”
But if I’m being honest with myself, I have to tell you that the reason I had to cover this piece today because the subject line of the ad read, “I bet you can’t name this company.”
To which I feel professionally bound to respond, in my inimitably mature manner, “can so!”
So let’s get on it, shall we?
The ad is signed by James Boxley Cooke, aiming to get you to join the Oxford Club for $79. Here’s the pitch about what a spectacular and top-secret company this is:
“In short, a certain energy company, a business that I estimate not one in 20,000 Americans can even name, is about to make a major announcement that will launch one of the most explosive stock run-ups in recent history.
“If I told you the name of the company right now, you would likely have no clue what I was talking about.
“And yet, according to CNN, this company is nearly 12 times more profitable than Toyota… three times more profitable than WalMart… four times more profitable than ConocoPhillips.
“It’s more profitable than Royal Dutch Shell, Exxon Mobil, BP and Chevron.
“And I’m talking bottom line profits here, not growth rate.Are you getting our free Daily Update
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“Furthermore, this company manages to make more money than all these industry giants, on just a fraction of the revenue.
“It might just be the world’s most profitable company.”
“According to their June 2012 annual report, they operate more than 6,988 wells producing natural gas, with reserves worth an astonishing $299 billion. They run 6,151 oil-producing wells. They own the largest gas transportation network in the world. They’ve installed 81 power facilities generating 37 gigawatts of power.
“They export more natural gas to Europe than any other company… And they own nearly a fifth of all worldwide supplies of natural gas.
“On top of that, they just rewarded shareholders with by far the biggest dividend increase in company history.”
And the ad says that for “one specific reason,” a “weird anomaly,” this fabulous company is three times cheaper than the competition. So who wouldn’t want to learn about something like that, right?
They also, of course, make absurd promises — such as that you might be able to “fund your entire retirement on just one stock.” That may sometimes end up being true for patient and persistent investors, but it’s certainly not something anyone should ever plan on … or promote.
They give a few examples of past wins they’ve had in their recommendations, stocks that doubled or tripled, and that’s just lovely — but of course, one stock that doubles or triples can’t “fund your retirement” unless you do something foolish like putting half your nest egg into that one stock…. and yes, like every other newsletter, I’m sure there are Oxford Club ideas over the years that they confidently expected to triple which instead fell by 50% or more (in our teaser tracking spreadsheets do have a couple 100%+ winners over the last few years like TAXI and KOG, but they also promoted possible 1,000%+ gains for a stock that turned out to be a real turkey in 2009).
Here’s another little excerpt from the long spiel about all the stuff this company does:
“Why Nobody Has Even Heard of (Let Alone Owns) This Stock… Yet
“The energy stock I’ve been talking about is a virtual baby in the energy business. Its first stock offering was less than 20 years ago.
“By comparison, Exxon Mobil’s origins go back nearly 150 years to the days of Standard Oil.
“But while Exxon Mobil, Royal Dutch Shell, BP and others enjoyed the benefit of a major head start, things have changed dramatically over the last few years.
“In 2012, this company’s oil exploration budget alone jumped to $6.1 billion. It will increase to $23 billion over the next three years.
“They’re opening an average of more than two new oil-producing wells every week… with 755 new oil producing wells coming online in 2011 alone.
“The firm operates gas and oil exploration projects in the United Kingdom, Vietnam, Bolivia, Russia, Algeria, Kuwait and more. As a result, they’ve set record highs for increases in gas reserves.
“The company now controls 18% of global supply. That’s approximately 35.6 trillion cubic meters, valued at around $300 billion….
“By dominating its markets, quickly expanding across the globe and consistently developing new resources, this company has created perhaps the greatest profit machine in the history of modern industry…..
“Earnings per share leapt 141%. Net profit jumped 141%. Dividend per share is up an astonishing 133%.
“Bottom line profits were nearly $45 billion. By comparison, Royal Dutch Shell had $30 billion in profits….
“Their current profit margins of 27.21% are more than double the industry average of 11.76%.”
And we hear from some outside sources, too, to help us believe that the Oxford folks aren’t just making this up:
“One of the few major analysts covering it called it a ‘mega-cheap valuation.’
“‘With the valuation insanely cheap at less than 2.7 times earnings, the stock will double as investors believe [this company] should be trading at double the current P/E multiple,’ they said.
“Forbes has called it the one ‘company investors cannot ignore.’ Adding, ‘What makes [this company] a buy is its position in the natural gas market, its massive reserves, and regional demand for the only clean burning fossil fuel around.'”
And what’s the reason that the stock is going to suddenly triple and become favored by the market? The short answer is, “it’s going to get a US listing” … here’s the longer explanation from the ad:
“To … bring the stock up to where it rightfully belongs, company executives have finally started loosening the strings.
“They now trade on the London Stock Exchange. They also have an ADR listed with The Bank of New York Mellon. Shares are traded on the over-the-counter market on the Nasdaq….
The Major Announcement… And Why it Could Triple Your Money
“This company has dominated almost every major market it’s gone after. Europe, Japan, India, China… You name it.
“But now, they’re about to go after another market…
“For the first time in company history, they’ve decided to enter the North and Latin American markets. Reports indicate they’ll target “a number of countries there, including, primarily, the United States.”
“Not only will Americans start seeing this company on billboards, TV ads and trucking gas and oil down the highways, but they’re about to see the company name on the front page of every financial newspaper across the country.
“In preparation for this big move into North America, our sources indicate that this company will soon make the shocking announcement that it will be listed on the New York Stock Exchange, the world’s deepest and most liquid market.
“When this announcement hits the mainstream media, the stock will go roaring up the charts.”
Well, that’s a long littany of clues, and a lot of hype teasing the “most profitable company in the world.” So who is it?
This is, as some of you may have guessed, the Russian gas giant Gazprom (GZPD in London, OGZPY for the sponsored US ADR on the pink sheets). Gazprom’s oil subsidiary, Gazprom Neft, is also publicly traded, by the way (GAZ in London, GZPFY on the OTCQX in the US), but this teaser appears to be for the parent (Gazprom owns more than 90% of Gazprom Neft).
And what’s the “weird anomaly” that makes Gazprom so much cheaper, by most standard valuation measures, than other major oil and gas companies? Well, my guess would be that it’s the 50.002% ownership by the Russian Federation, which has strategic imperatives that aren’t necessarily the same as outside shareholders (Gazprom is one of Russia’s “National Champions” — companies that are expected not only to grow and be profitable but to benefit the Russian national interest). About 28% of the shares trade outside of Russia, in ADRs in London and NY mostly, and those shareholders are all quite aware, I’m sure, that Gazprom is controlled by Vladimir Putin and his government.
The plus side of that is, Russia won’t take Gazprom over and de-privatize it or throw the CEO in jail as they’ve done with private companies run by upstart oligarchs in the past … but that’s only because it’s not really private to begin with since the Russia government already has more than 50% of the shares and can therefore do pretty much anything they want with the company.
There are a lot of state oil companies in the world, including some that have partially privatized and kept a large government ownership, and I don’t necessarily object to all of these as a matter of course — there are some, including Petrobras (PBR) and Statoil (STO) that I’ve invested in over the years, too, and both of those have effective 50%+ control by the government, as do, I presume, the Chinese majors like PetroChina (PTR), though Chinese state ownership always seems a bit murkier. PBR, STO and PTR all trade at substantial premiums to Gazprom, which is partly a reflection of the operational opportunities and efficiencies of those companies and partly, I presume, a reflection of the relative investor concern over government interference from China, Norway and Brasil compared to Russia. Petrobras, by the way, is also a recent cautionary tale for state oil investors — they are still a huge and regionally dominant company, with large discoveries, but they are pressured on prices domestically and also strategically directed to invest heavily and rapidly in their deepwater offshore projects that are incredibly expensive (not that this is a bad strategy, but the costs are impacting near-term earnings and driving up debt).
The other risk, coming into investors minds more recently, is that Gazprom does also have some operational challenges — challenges that are leading them to invest very aggressively both in Russia and overseas to build their supplies. They went cash-flow negative in their last report (though they did have good earnings growth, thanks in large part to currency exchange rates), and reported a lower 2012 dividend than folks were expecting, but have still been growing quite nicely.
I can’t fully analyze a company this big for you in the few minutes we have together today, but the concern seems largely to be two-fold: Gas prices and demand have been down in Europe, which is Gazprom’s largest export market thanks to their easy pipeline access, with Europeans demanding lower prices now; and Gazprom is spending a LOT of money to develop fields and expand production both at home and abroad. So yes, the company is dirt-cheap, probably absurdly so, and pays a solid dividend that beats most oil companies (the trailing PE really is under 3, and dividend yield is around 6%) but there are reasons for it to be cheaper than most of the big oil companies. Whether or not it should be this much cheaper is, of course, your call to make — it is, after all, your money.
We’ve seen somewhat similar teases over the years for the most independent large Russian oil company, Lukoil (LUKOY for the ADRs), and though Lukoil has generally moved up pretty well over the years it has not closed the discount gap — it has moved up about the same as most oil companies have over the last five years, and is still trading at a PE ratio below 5, cheaper than pretty much any big energy company in the world (except for Gazprom, of course). So the fact that it’s cheap doesn’t mean it will stop being cheap anytime in the foreseeable future — Lukoil and Gazprom both have reserves, cash flow, earnings, etc. that should give them better valuations, but they also have challenges and political overhangs that could also give them even lower valuations, there’s no rule that says a cheap company has to become less-cheap on any given timeframe, particularly if the company is cheap for real and persistent reasons.
The biggest reason for the cheap valuation of Gazprom, I would argue, is the political overhang and the state control — and I can’t imagine that going away, though it does wax and wane in terms of the importance it holds in the minds of investors. A New York listing for Gazprom would very likely help the stock, at least in the short term, but I have heard no rumors or reports of that happening other than this ad from the Oxford Club, and frankly I think it’s still unlikely given Vladimir Putin’s focus on building Moscow into more of a financial center and strengthening the Moscow Stock Exchange (which is going public in an upcoming IPO) — I suspect that Putin will want Gazprom, Russia’s largest company, to trade more actively in Moscow.
It’s possible that Gazprom could get a listing on the NYSE, I don’t know, but if it does it might just take some of the volume from London and I can’t imagine that they would issue new shares that dilute the government’s control. That’s just my opinion, of course. I don’t think that would be anywhere near enough of a push to get the stock to trade at, say, seven times earnings instead of three times earnings — for that, we would need investors to revalue Russia in general and to change the way they discount Gazprom for being a “national champion.”
The bit from the tease about Gazprom tackling the US included a quote from an article, but that was a Russian article about the potential for Gazprom to export LNG to the US and Mexico. That might happen, but the more likely push from that is Gazprom partnering with Pemex to help them boost gas production in the Gulf of Mexico — shipping LNG from Russia to Mexico and the US would just be stupid. Gas is worth far more in Seoul, Tokyo, or even Rome or London than it is anywhere in the Americas, and US pipeline supplies of cheap gas from our booming shale regions are likely to depress investment demand for gas production in Mexico.
The “major analyst” they quote as calling Gazprom “Mega-Cheap” seems to be a Seeking Alpha contributor, though certainly other analysts have noted that it’s at a very low valuation — that SeekingAlpha article is here if you’d like to read the bull case, which is basically that the shares will double because investors will close the PE gap between Gazprom and other energy majors.
And the bullish Forbes quote is from a contributor who wrote a bullish article back in 2011, you can see that here. And yes, Gazprom is probably the one Russian company investors “cannot ignore”, but that’s also largely because it’s so freaking huge — Gazprom is 8% of the most widely traded Russia ETF (the Market Vextors RSX), and is a far larger holdings in other funds that aim to represent the Russian market like ERUS (19% Gazprom) or RBL (17% Gazprom).
If you want a less optimistic take, Reuters had a pretty good brief article here covering Gazprom’s most recent earnings, including quotes from some analysts who have concerns over capital spending and efficiency. There has also been recent concern about Russia loosening up the monopoly that Gazprom has over gas, partly to spur faster investment in LNG export facilities (an area where they are about as far behind the gas-exporting world as the US).
So there you have it — Gazprom’s cheap, no argument there. The Oxford Club folks seem to think it’s going to triple this year because folks will realize they’re too cheap and they’ll get a NY listing. I have invested in a few Russian companies over the years and own one now, but I can’t say that I know this company particularly well and I don’t really have any interest in buying a Russian commodity producer, even one as cheap as Gazprom — but that’s just me. What do you think? Let us know with a comment below.