 Good day, fellow investors. Welcome to a new podcast with Sven Lorenz from undervaluedshares.com. And this is a very interesting podcast on Gazprom and why is Gazprom such a hated or loved stock? And Sven has written more than 100 pages of reports over the last few months on Gazprom. And that's why I like to talk to him because he's so detailed on the stocks that he analyzes a more often overview investor. He's a detailed investor. And therefore I think the combination is perfect. Sven, say hi. Hi, good morning to Amsterdam and to everyone. So the topic today is Gazprom. I'll quickly start with why I bought Gazprom in the first place a few months ago. Sven's report helped me on that. We are both long Gazprom for full disclosure. And then Sven will go on discussing some very interesting topics related to Gazprom. And that is the perception gap investors have where they might be wrong. The IPO, potential IPO of Gazprom subsidiary related to exploration, will discuss the Nord Stream two implications, the positives and the negatives, the gas monopoly, the pipelines. And then how Gazprom evolves from being in a mega investment cycle with the power of Siberia, Turk Stream, Nord Stream, transitioning into a cash harvesting business company, like many other Russian government owned companies did, which we have already seen with the dividend hike. And then also there is something very interesting. The management is changing, which is always an interesting transition within such a company. So the new CFO is coming. So many, many new things with Gazprom. And this will help you make the decision whether to hold or sell now after the stock is what, even 40% up from the lows that have been in March, I think. I'll start just with a quick overview on why I bought Gazprom in the first place. For me, it's pretty simple. I look at value, I look at margin of safety. Can I lose money? And if you just look at the power of Siberia, they spent 60 billion on that. And the market cap was $50 billion. You're practically just paying for the pipeline to China and everything else that includes the largest natural gas reserves in the world, other pipelines to Europe, through Ukraine, et cetera, a price earnings ratio between three and five, depending on gas prices. The dividend yield now still at 8%, which it was, it is 12% for those who bought earlier, 90% ownership of Gazprom neft and then 10% ownership of Novatec and much, much more. There was always concerns that this is Russia. It's a government owned company, Russian tycoons, cronies will steal you. But it might be all because of the wrong perception because Gazprom has evolved from the company. It was, I think, a quarter of the current company 10 years ago when the market cap was five times bigger. So I'll let Sven discuss a little bit the perception gap and we'll create a chat of this podcast. So Sven, I'll give you the words to talk more about Gazprom because I know you know a lot of details that our viewers will find interesting. Yes, so let's start with talking about what I always like to call the perception gap. That's when you have a difference between the reality on one hand and what a certain audience is perceiving a subject matter to be. And in the case of Gazprom, the perception gap quite simply consisted of, if you asked pretty much any investor at the end of last year what they thought of Gazprom, the number one concern they always raised immediately was, oh, Putin is going to steal all the money. If you're a shareholder there, you're never going to see any of these profits. So why should I become a shareholder if corrupt company officials are stealing my money? And the reality actually looked quite different already at that time. And that's what I spend most of my time on. I try to find companies that are perceived in one way which is mostly a negative way because I'm looking for companies that are undervalued, that are cheap by conventional standards and based on fundamental analysis. But where the reality when you check all the details and when you go really deep into the subject matter where the reality is already quite different, and then you obviously also need a good reason why the perception of the wider audience should change because if the perception doesn't change then the share price is going to stay the same as well. Gazprom could be cheap forever if people never start to believe in Russia and in the company. And what I found last year was that, I mean, first of all, when I published my first extensive report on Gazprom at the end of November, which is what you read and when we started to talk as well, the company was already paying or expected to pay a dividend that amounted to a yield of five or 6%, which was already a contradiction to this perception of Putin is stealing all the money. So, I mean, if he is stealing all the money, how could I possibly get a dividend yield of five or 6% from this stock, which is one of the reasons why I started to look into it. And what was just a discrepancy there, they have been announcing the dividend hike for the last six months. So it was practically 5%, but we already knew that it would be at least 8% because the double digit rubble dividend was already announced. So it was really something in the making being announced as it is a big company. So the things were there, the notifications, it was just that you had to pass that, okay, they are stealing the money. There's always this, yeah, another perception if you wanted to say that as an analyst, you need to look into the future, you need to have a crystal ball or as an investor, you need to be able to accurately predict what will happen in six months. And sometimes it can be a lot easier than that in the case of Gazprom. I read extensively about the company, went through all the company documents and looked at the balance sheet, the projections for the capital investments. And it was fairly clear already at the time that the dividend policy was going to change. There was no magic in predicting this. And this is why I actually put onto the cover page of my report that in 2019, we're going to have a major change in the dividend policy of Gazprom. That was the starting point of my entire reasoning. And fast forward five months, the company announced that it's going to double its dividend for 2018, which is a huge jump. The market got completely caught by the surprise because no one was even looking at Gazprom anymore. And it led to two things. First of all, as you already mentioned, those who bought back when we first spoke about it are now getting a dividend yield of 12 or 13%, which is very nice. And even those investors who are looking at it right now, the share price has made an initial jump already. You're still getting a dividend yield of 8%, which is an extraordinary high amount. And because of these numbers and because there is so much cash coming out of the company to the shareholders and not to some corrupt officials as everyone seemed to have assumed, because of that, the stock market has now started to pay notice again. Gazprom is appearing in the media. I've just received a very extensive analyst report from a bank. The perception is changing and the share price is already up 50% in the last half year. The dividend is being paid out. We have the prospect of yet higher dividend payments in the future. We're going to speak about this at the end of this talk when we speak about the investment cycle. So it's a great example of how fast perception of a company can change, how you can quite accurately predict it if you just make the effort to go through these hundreds and hundreds of pages of documents that companies put out, which nowadays hardly anyone reads anymore because everyone's too busy, and how you can make significant amounts of money of that in a fairly short period of time. Now we will discuss later the dividend. I'll just quickly discuss my view there. When I compare Gazprom and then another hint for me was Rosneft because they have increased their dividend payout from 25% as is Gazprom's case to 50% of net income. And the stock reflected that. And it is logical that one, if one big government owned company does that, probably also the others will follow. And if that happens in one year or five years, you never know when it will happen. But when it happens, the shareholders will be rewarded. And I can even take your logic a step further and add another aspect to this. So the payout ratio for government-controlled companies in Russia is actually legislated to be 50%. And the extraordinary kind of company opt to pay less than the 50% of the net profit as a dividend. In the case of Gazprom, because the company had to invest such large amounts of money over a number of years, the government took a step back and said, well, we're happy with a lower dividend because the company is investing the money, which will lead to a bigger payout further down the road. And now Gazprom is catching up and eventually will have to pay out those 50% of net profits. It's up to debate between the government and the company and the shareholders. So it's not going to overnight change to a 50% payout ratio, but it's actually legislated. So all the clues are there. It really doesn't take that much to figure it out. It's a matter of timing, making a judgment about how the overall situation evolves. And now we're seeing the first fruits of that. So that's very interesting. And then let's continue on with what are the other things you have found. What about these IPOs? Where did you get that information and what are the clues there for Gazprom exploration? So this is a piece of information that I think your viewers on YouTube are now going to be among the very first worldwide who will actually hear about this. So back in my report, I predicted and it was a slightly daring and adventurous prediction that Gazprom was going to probably spin off one or the other company and quite possibly listed, not necessarily maybe on the London Stock Exchange or the New York Stock Exchange, but look towards Asia as well where you've got some very big stock exchanges with a lot of wealth looking for investments. Singapore, Hong Kong. And I cited a number of reasons why Gazprom was likely to do that. And last week, one small bit of information appeared on Bloomberg terminals. The Russian Interfax Agency has picked up that the exploration subsidiary of Gazprom has put out a tender for managing an IPO of the company, including possibly on an Asian Pacific Stock Exchange. So the exploration subsidiary of Gazprom is obviously a very, very important business unit because that's where the future of the company is created by exploring for new gas reserves. It's also quite a considerable operation in terms of the investment it requires. And for the company to publish a tender to prepare for a possible IPO is major news. No one has really picked up on it yet. I've just looked again this morning. There's been no report in Western media about this yet. And obviously it's right now just a tender. It's not finally decided that there's no concrete plan. But this is just another sign that major changes are happening at Gazprom. And I believe the company is entering a new era. It'll be its 30th anniversary in August. And I think going into the fourth decade will bring unprecedented change because companies ripe for that. And I think the management and the majority owner, the Russian state has woken up to this. And to see this advanced notice of a potential IPO of the company that is called Gazprom-Giulogo-Ratsvetka, which I hope I've pronounced reasonably accurately, that is a major development. I think we're going to hear a lot more about this. And this can in turn create more media interest, more talk about the company, additional analyst reports. So there's a lot to look forward to in the next couple of months, I think. All right. And what about the Nord Stream 2 issue that so the media is not focused on long-term developments, of course, they are always focused on the short term. What is your comment to the focus now, which is the Nord Stream 2 and what's going on with that and the Ukraine deal that's about to be that ends the 10-year license. So how will that be renegotiated and things like that? So the short-term market, the market's risk that they focus on. Indeed, it's very important to talk about Nord Stream 2. And if you look up any news to us, then most likely you won't find a single report about Gazprom that does not mention the Nord Stream 2 issue in some shape or form. It's really dominating the news about Gazprom so far, at least, until the last two weeks. And so let's just briefly talk about what Nord Stream 2 is, what the issues are and why I believe this is going to also see some major and possibly quite surprising changes. Nord Stream 2 is a offshore pipeline that Gazprom is currently building through the Baltic Sea, which will connect the Gazprom gas supplies directly to Germany. And it's a major pipeline. This is going to add significantly to the capacity of the Gazprom pipeline network going into Europe. And it's also going to be a very direct link into the largest market that Gazprom has in Europe, which is Germany. Now, Gazprom has a market share in the European Union of 37%. So it's not a monopolist, but it's a dominant force. It's the largest provider right now. And this has led to all sorts of political repercussions in the last couple of years. And at the very core of the Nord Stream 2 issue that you see appearing in the media is the fact that today this pipeline could not legally be started anymore. And the entire model of Gazprom delivering gas to Europe as it does right now, could also not be put into place anymore. And let me explain just very quickly why that is the case and why this could trigger a whole number of transformative changes on the level of Gazprom now. So the European Union has pursued an energy strategy that I believe is quite sensible. It tries to create competition and open markets within its European Union zone. And it also created legislation, which again, I think is fairly reasonable, that a gas producer is not also allowed to own the pipelines and the means of transportation for the gas. They just want to create a market where companies cannot get anywhere near having a monopoly position or can abuse their market power in a country to possibly switch off the gas supply. There's an argument about supplies and prices. And Gazprom currently does have a monopoly on exporting gas in a gaseous state from Russia. And it is basically, if you looked at it, it is violating the spirit of the EU legislation. However, nothing can be done about this because the legislation was put into place only very recently and Gazprom has been operating on this model for decades. So you can't apply laws retrospectively to someone, which is why Gazprom got away with it. And Nord Stream 2 is another example of that. The pipeline was planned at a time before this legislation was put in place, which is why even the Danish Prime Minister was quoted in the media saying recently that there is nothing the European Union can legally do against the Nord Stream 2 pipeline project. However, they can obstruct and they can be very political and they can be slow in terms of giving permissions et cetera, et cetera. And there's a bit of a cat and mouse game going on with Nord Stream 2. And I think Gazprom and Putin, who is the ultimate driver behind Gazprom, they're probably going to do something quite surprising. I think they're going to liberalize the Russian gas export market and they are going to allow other Russian gas producers to use the Nord Stream 2 pipeline, which would make all of these issues go away overnight because all of a sudden, Gazprom would voluntarily adhere to the new EU legislation. One last aspect about this because the obvious next question is well, why would Russia do this and wouldn't this be to the detriment of Gazprom? It's a fairly simple and clear situation. First of all, Russia has been working towards liberalizing its gas export market for a number of years already and the most important step there was in 2013, when Russia allowed and liberalized the export of liquid natural gas, any Russian gas producer can export LNG. Gazprom only kept the monopoly for exporting gaseous gas through pipelines. So the market was already partially liberalized, which is why now one third of the Russian gas exports is actually LNG and Gazprom's market share has gone down significantly from formerly having almost 100% once. And Russia and various Russian government authorities and including Vladimir Putin have been very clear that they see as the end goal full liberalization of the Russian gas export market. And there's always the right timing for everything and Russia couldn't really do this while Nord Stream 2 was being built and a variety of other projects that were playing into this were also under way such as Turk Stream which is on the fringes of all of that entire issue. But the timing seems to be right now for the next step in the liberalization of the Russian gas export market. And as I said, and I've written a 31 page report about this which I published on my website last week which is sort of for Gazprom Geeks, that's all the details about this. I think the timing is going to be right in the next one to two years and Putin is a man who loves making surprise moves and the economic and financial rationale behind such a liberalization would be very, very compelling and it would make the entire Nord Stream 2 European Union issue go way overnight. There would be nothing anyone do and nothing anyone should do about it. And I think this is going to have yet another transformative effect on the company. And you can see this is a feature length subject. Nord Stream 2 we talk about for ages but it boils down to one single prediction on my side. The issue is going to go away completely and there'll just be even more gas sold from Russia to the European Union who need the gas because their own gas production is falling and it's falling quite dramatically. Yeah, there has been an earthquake here in the Netherlands last week in the northern part of the Netherlands, Groningen and it was all around the news and all those earthquakes which is a non earthquake area are because of the gas, yeah. So that will be probably closed down because when you hear on the news that 3000 houses have had damage because of the last earthquake they are going to slowly wind it down and the fields here, gas fields in the Netherlands are quite large. So they say they will switch from gas to something else over the next 30 years but 30 years is a very, very long period. Yeah, and so you have that issue in the Netherlands. You also have the gas reserves in Norway are gradually being depleted. The British North Sea is massively going downhill in terms of production and the energy has to come from somewhere and the option is you can buy liquid natural gas from the United States or elsewhere for a lot of money, it's a lot more expensive or you can buy cheap gas from Russia from a variety of producers who are competing against each other. It's an open market. Once it's all fully liberalized, there's no reason not to buy it. Yeah, and with the pipelines I have looked at all those because Seth Klarman is an owner of Cheniere Energy, the LNG liquidification processing plants in the United States and they really depend on how cheap gas in the US is. Then there is a nice premium on the liquidification plus the transport. So it cannot compete with Russian gas in Europe. It's mostly for the rest of the world where Russian gas cannot yet come. So that's a risky play. I don't know how profitable it will be because there are other plants coming up in the Middle East with a lot of gas, a lot of LNG that will be even cheaper. So long-term we will see there will always be ups and downs and volatility but long-term it's probably the cheapest gas. And this also explains, if they own the cheapest gas, they know what they were doing with their mega-investment cycle over the last 10 years, which is now being closely winded down with normal, the normal capex, the normal smaller investments but the crazy big Russian megalomaniastic investments should be closed and should start bring to higher cash flows and higher dividends as we have seen already. Yes, and for the benefit of your viewers, let me just very briefly summarize what these three projects were. So that was, you mentioned already the power of Siberia pipeline that was built to China. China is the fastest growing market for gas in the world. And now finally from December onwards when the pipeline will be switched on after I think 14 or 15 years since the first discussions about it, Gazprom is going to deliver straight into the Chinese market. I've been just reading about paper stock in China and in the annual report, the next moves are switching from coal plants to gas plants for lower emissions and environmental control. So China is really working hard and implementing gas regulations there. So that should be a benefit for Gazprom. Yeah, and it's all starting in December. So from next year onwards will be as Gazprom shareholders will be seeing the benefits of that. There was the combination of the Nord Stream two pipeline and the Turk Stream pipeline, both of which is ultimately leading into European markets. And what fewer people have on their radar screen were the significant, very significant investments into the Yamal gas fields. Some of the older gas fields of Gazprom needed replacement. So there was a lot of investment going into the Yamal region to take the gas fields there to production. Gazprom invested well over $100 billion. I think it's actually, once you add it all up it's probably closer to $150 billion. Even for such a large company that was a major, major, well investment cycle as you called it, that's the right word. And Gazprom will continue to invest significant amounts of money. There's a lot of things they still have to do, but they would have to try very hard to create another such major investment cycle. There's just not that much there that they could possibly spend money on, which is why there's now almost an automatism always assuming that gas prices stay on a certain level and you know, world politics, et cetera, et cetera. But outside of that there's almost an automatism for the free cash flow now rising quite significantly in the years to come. And if you saw in February a document that I actually recommend for anyone who wants to read something that was issued by the company, they published an investor presentation in February which is on the website of Gazprom. And on the cover page it says something about the new cycle for the free cash flow, which is the investment theme for Gazprom for the next three, five, probably 10 years. I think Bloomberg was estimating about $7 billion in free cash flow in 2020. What are your estimations? I struggled with something that you also mentioned in the beginning already. There are always different estimates and there are some very opinionated people out there. So I've just looked at a research report about Gazprom that was issued by Wooden Company and they also say that the current estimates for the price earnings ratio to stick to that one somewhere between three and a half and five. So I mean, that's quite a margin. It goes to show that because Gazprom is such a vast and complex company with so many different operations, it's very hard to predict precise numbers. But when I have to stick my finger out there, I would say the shares probably trading at a price earnings ratio right now for four or less. And I mean, that leaves it beyond any doubt that it's extraordinarily cheap and the payout ratio is still not even anywhere near those 50%. So in terms of increases in dividend, even if the free cash flow increases a little bit slower than we hoped for, there's still significant room for the dividend being increased because the investment cycle has come to its end. And I think the market expects a 7% yield from Gazprom. So if they hike the dividend, probably the stock price will follow to give you a 5% to 7% yield. Yeah, which means you have very limited downside and there is significant upside for a whole variety of factors as the ones that we've already discussed. And how does the new management, the new CFO fit this whole picture? Yes, so one of the lesser, once again, lesser observed factors at Gazprom in recent times was that in the first half of the year, there have been major changes on a management level. These were probably the most far-reaching changes and replacements on a management level that Gazprom has seen in the last 20 years almost. The CEO is still the same. He's been the same guy since 2001, but they replaced the CFO, the chief financial officer. And very interestingly, he's going to give a presentation on June the 20th, which I honestly cannot wait for. He's also replaced, he's basically replaced his team for CAPEX and investments. And it appears, at least that's what you hear in the rumor mill, it appears that on June the 20th, they're going to make a few statements about some significant changes to the investment strategy of the company. One of those changes could be that subsidiaries are spun off and raise money elsewhere, as we've heard in case of the exploration subsidiary. A spin-off ultimately also has a very concrete financial rationale. You want to raise outside funding and raise it cheaply so that you have cheap financing or refinancing for your projects. As a side effect, you increase your exposure to investors, you become more transparent, et cetera, et cetera, et cetera. But you have more cash for yourself. Simply more cash, yeah, you can refinance other investment projects that already exist. And it appears that under the leadership of the CFO, a number of key aspects of the investment strategy of Gazprom are going to change. I hope not just one, but several spin-offs is among it so that this vast empire is gradually becomes a bit more easier to grasp and easier to analyze. And yeah, lots has happened on that front. We've also had two Gazprom executives arrested in a Russian region in a remote region because they were involved in corruption. So the company is tackling that subject. There is corruption in Russia. There's no doubt about it, but the company is tackling that. All of that comes together to a very interesting picture where you see changes on so many levels and who would have thought Gazprom was perceived as this company that never changes and it's a boring, stage-run Russian company, but it's not quite what reality is when you start digging into the details and you check the facts. My favorite chart with Gazprom is always the one showing the market capitalization. And then if you look at 2007, 2008, you see really exuberance over Gazprom, probably on the promise of what it can become over the next decade. Actually, Gazprom has become that company, but the market cap is not exuberant anymore simply because of the developments in the past, the war with Ukraine, et cetera, has become very negative, but the company just did what it promised to do 10 years ago when the market cap was much, much higher. So to conclude, we can say that the risk reward is still skewed toward the reward. If you like a nice dividend of what we are now, 8%, it can always be lowered depending on gas prices. It won't be, it isn't a given, but it probably will not go below 4% or 5%. So if you can wait and see what this company develops, then it's still a hold, right? Absolutely, and I think you summarized it very nicely and to that I would add, so as we discussed in the last video that I did with you, I've just relaunched my investment website after spending a number of years doing other things in the private equity space mostly. And I spent about six to eight months thinking about what is going to be the first stock that I will discuss and analyze and by extension recommend on my blog. And I put myself under a fair bit of pressure because I wanted that to be something that I very much believe into myself that has a prospect, not just for the next one or two years of delivering good returns, but that is an investment that my friends and my family could purchase with a view to three or five or eight or 10 years. And in the end, I decided to write this quite extensive piece on gaspom, which I also wrote with a view to, I want this to be an almost timeless report. So the members of my website or those who are interested in it, they will find this report still useful, even though it came out in December. And I've just issued that additional 31 page report just about the monopoly status and North Stream and these sort of things that are interesting for gaspom. And I've done all that because I very much believe in gaspom being a long-term play that if you are a value investor, if you buy a business, if you want to find companies where a catalyst or catalysts lead to sudden changes in the valuation, I think then gaspom is truly one of the companies you need to have on your radar screen. It's in my top 10 shares worldwide right now. And there is always risk, there will always be risks with Russia and the sanctions and who knows what. But as Charlie Munger said, whatever happens long-term, it's actually most profitable to keep the gas in the ground or the oil, which I think few people understand, but the actual value of the company is always in the reserves that are in the ground that can be exploited somewhere, sometimes in the future. It's impossible that gaspom goes bankrupt because the debt is what, 30 billion and the cash flow is 20 billion, so they can sell just whatever part of the company and they be debt-free, which is really, really crazy or they can pay off it in one year, they can pay off the debt and be practically with very, very low risk no matter what happens. All right Sven, thank you for this nice presentation. It's really nice how you dig deep into the details and that really supplements what I do, which is more of an overview risk reward value investing. So that's why I think the combination is really, really good. And well, I hope I'll see you in the next video about some other very interesting detailed analysis of interesting risk reward undervalued shares. Thank you Sven, take care. And thank you investors for watching. If you like this value investing perception on investing, please subscribe to the channel as value investing is all what this channel is about.