A recent report by Bank of America has helped power up the Gazprom [MCX:GAZP] and Novatek share price, as the investment bank raised its earnings estimates for the two companies on the back of rising gas prices and Russia’s role in alleviating the European energy crisis.
Global gas markets have tightened considerably, according to the bank, in the aftermath of the cold winter at the beginning of this year. This, it added, has been reflected in European spot gas prices, which have quadrupled since the start of the year.
Russia has been accused of deliberately cutting supply and sitting on a stockpile of gas which could if exported lower prices.
Bank of America said in its report: “Depleted storage levels, limited liquefied natural gas (LNG) flows, and Gazprom's reluctance/inability to increase flows are the primary reasons behind the market tightness.”
“Depleted storage levels, limited liquefied natural gas (LNG) flows, and Gazprom's reluctance/inability to increase flows are the primary reasons behind the market tightness” - report by Bank of America
Depleted gas storage levels
BofA added that Gazprom had not booked more capacity on Ukraine’s gas pipelines to Europe but there were clear reasons for this. Its production year-to-date was close to a 10-year peak. Depleted storage levels in Russia still needed to inject about 10 billion cubic metres (bcm) of gas into its underground storage facilities in order to return to normal.
“Our examination finds that Gazprom's ability to send additional volumes to Europe is constrained,” said the report.
Gazprom’s share price has climbed steadily this year from 172.46 Roubles at the close on 6 October 2020 to 357.93 Roubles at the close on 28 September when the report was released. It now sits at 376.06 Roubles at the close on 4 October.
Rosneft and gas liberalisation
Rosneft share price failed to get a lift from the report. Its stock had climbed from 392.45 Roubles at the close on 6 October 2020 to 626.75 at the close on 28 September. Its share price fell after the report to 616 Roubles.
According to the report last month, Rosneft sent a widely discussed proposal to the Russian government calling for the liberalization of the pipeline gas exports. “We believe gas market liberalization should be beneficial for Russia, while access to export markets could ensure additional market share and compliance with the European Third Energy directive,” the report said.
Russian gas market liberalization had started several years ago with LNG. Since then, Novatek has launched the 20mtpa Yamal LNG project. The company has also attracted over US$10bn of foreign investment in Russian LNG projects. “Fears that Russian LNG flows will compete with Russian pipeline exports have not materialized as Gazprom has actually expanded its European volumes,” the report said.
Novatek’s share price has climbed from 1,113.6 Roubles at the close on 6 October last year to 1,864 at the close on 28 September. It now sits at 1,953.00 Roubles.
“Fears that Russian LNG flows will compete with Russian pipeline exports have not materialized as Gazprom has actually expanded its European volumes” - BofA report
Russian Gas Beneficiaries
Bank of America raised its medium-term gas price forecasts and updated Gazprom and Novatek's target prices from 395 Roubles to 413 Roubles and from 1656 Roubles to 1878 Roubles respectively.
It added that should Rosneft's proposal succeed, at an export gas price of US$200-300/mcm, it sees a US$0.3-0.8billion contribution to the company's EBITDA on an annualized basis and up to US$2.1bn at the current 2022 forward Euro TTF price of around US$530/mcm. “Should gas exports in Russia be partially or fully liberalized, Rosneft should be one of the main beneficiaries.”
Bank of America also raised its earnings per share estimates for Gazprom by 4-11% for 2021 to 2022 to reflect higher assumed export gas prices.
European benchmark futures for delivery in January 2022, when heating demand is expected to peak, have hit a record 66 euros ($78) per megawatt-hour, up from 16 euros a year ago.
The drivers have been low gas storage levels, growing demand from Asia particularly China, lower renewables output and nuclear maintenance outages.
BoA said European storage levels are roughly 10% below their five-year average.
Tom Marzec-Manser, Natural Gas analyst at market intelligence firm ICIS, told ABC that Russian production problems over the summer and higher domestic demand had been a factor in lower supplies to Europe. “There are also theories that Moscow is intentionally supplying less than it could to encourage Germany to speed its approvals process for the controversial Nord Stream 2 Pipeline, which will transport natural gas directly from Russia into the European Union”.
“There are also theories that Moscow is intentionally supplying less than it could to encourage Germany to speed its approvals process for the controversial Nord Stream 2 Pipeline, which will transport natural gas directly from Russia into the European Union” - Tom Marzec-Manser, Natural Gas analyst at ICIS
Goldman Sachs analyst Geydar Mamedov agrees with BoA that Gazprom will benefit recently raising its price target to $12 from $10.50. He said, as reported by The Fly that “a supply crunch and extreme physical tightness in the European gas market have pushed gas prices to record highs with gas inventories at historical lows. Gazprom is a major beneficiary as roughly 60% of its EBITDA is generated from gas sales in Europe”.
The BofA report quoted Gazprom saying, that approval of the Nord Stream 2 pipeline would allow it to ship 5.6bcm to Europe by the end of 2021.
In the meantime, Norway’s state energy company Equinor which supplies around 20% of the natural gas consumed in Europe, is going to step up exports.
But it is likely that gas prices will remain high.
“We look like we are going to be locked into pretty high prices through the winter. We are going to be quite vulnerable to some sort of big intraday spikes,” Murray Douglas, research director at Wood Mackenzie told CNBC.
An ETF to watch which holds some of the key stocks is the iShares MSCI Russia where Gazprom has a 19.23% weighting, Novatek has 4.75% and Rosneft with 3.42%.
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