Gazprom Picked Over Novatek in VTB Call: Russia Overnight

OAO Gazprom’s record discount to Russian rival OAO Novatek is narrowing in the stock market on prospects that profits for the world’s largest natural gas producer will improve.

American depositary receipts of Gazprom rose 0.9 percent in New York yesterday to trade at 2.8 times estimated earnings, 79 percent below Novatek’s valuation, narrowing from an all-time high of 83 percent reached July 2. The Bloomberg Russia-US Equity Index of Russian companies traded in the U.S. increased less than 0.1 percent to 90.98, while futures on Moscow’s RTS Index rose 0.1 percent to 132,330 in New York hours.

VTB Capital, the investment arm of Russia’s second-largest bank, reiterated its buy on Moscow-based Gazprom last week after reducing its recommendation for Tarko Sale, Siberia-based Novatek on July 4. Gazprom is cutting its investment plan and pledged last month to delay construction of Power of Siberia pipeline until it reaches a supply agreement with China. Exports to Europe increased in July, reaching a five-year high, the company said on Aug. 1.

“Gazprom is cheap and attractive, while the company is beginning to improve,” Ekaterina Rodina, an analyst at VTB Capital in Moscow, said by phone yesterday. “It will further shrink its discount to Novatek, which had been rising because of Gazprom’s weakness.”

VTB Capital has a buy recommendation on Gazprom’s Moscow-listed stock and a hold on Novatek. Half of 20 analysts covering Gazprom’s stock recommend buying it, with the other half recommending to hold it, data compiled by Bloomberg show. Gazprom’s buy recommendations recovered after reaching the lowest level on record last month, the data show.

Buy Recommendations

Analysts’ recommendations to buy Novatek’s Moscow-listed stock have been decreasing for the second consecutive months, falling to a three-month low of 58 percent in August, data collated by Bloomberg show.

The RTS Volatility Index, which measures expected swings in the stock futures, gained 1.8 percent to 22.95 yesterday. The Market Vectors Russia ETF gained 0.7 percent to $26.32.

Gazprom, Russia’s gas export monopoly, has seen its market capitalization in New York drop from as high as $369 billion in May 2008 to a four-year low of $76.7 billion in June, after the company increased its spending plans amid declining exports to Europe and as consumers won price disputes against the producer. The market value has since recovered 21 percent to $92.6 billion.

The company reported that exports to outside the former Soviet states rose to the highest level in five years in July, according to the Aug. 1 statement. The average daily export volume increased 29 percent in July from a year ago, according to the statement.

‘Sustainable Trend’

“Gazprom is undervalued by the market,” Oleg Maximov, senior analyst at Sberbank CIB in Moscow, said by phone from Moscow yesterday. “The market is not yet taking into account Gazprom’s rising exports to Europe, which is a new and sustainable trend.”

Gazprom rose 0.7 percent to 129.03 rubles, or $3.91, in Moscow yesterday, and increased 0.6 percent to $7.79 in London. Each ADR represents 2 ordinary shares.

Currently limited to Russia’s domestic market, Novatek is awaiting the government’s decision on loosening Gazprom’s control over exports of liquefied natural gas later this year. The government will discuss next month whether to let other companies than Gazprom export liquefied natural gas, known as LNG, and new legislation could be approved by year-end, Deputy Prime Minister Arkady Dvorkovich said in Moscow Aug. 9.

LNG Shipments

The change has been sought by Novatek, which is building a $20 billion plant on the Arctic Yamal Peninsula to produce natural gas chilled to a liquid for transportation by tanker. President Vladimir Putin said in June that Russia should consider liberalizing LNG shipments to add sales to Asia, outside the reach of Gazprom’s pipelines.

Novatek gained 2.3 percent to $117 in London yesterday, settling at a 8.8 percent premium to the company’s Moscow-listed stock, the most since July 30.

United Co. Rusal, a Moscow-based aluminum producer, rose 1.2 percent to HK$2.60 in Hong Kong trading as of 10:41 a.m. local time. The MSCI Asia Pacific Index gained 0.4 percent.

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