Ukraine Crisis Is a Buying Opportunity for Russian Energy Giants

On Monday, Russia's stock market index plummeted over 10% in one trading session. This was just the latest in a general trend downward which began weeks ago with unrest in Ukraine and eventually saw the ouster of pro-Russian President Viktor Yanukovych by protesters and his replacement with a pro-West interim government.

It didn't stop there. The ouster of the Yanukovych government saw the rise of a new round of protests in the Crimea, where a solid majority are ethnic Russians. These protesters are seeking secession from Ukraine, and possible reaccession into the Russian Federation. The Crimea is a strategically important area for Russia, as it is the home of their Black Sea Fleet. This has led Russia to back the secessionists both rhetorically and militarily, sending troops to the peninsula to prevent Ukraine from reconquering it before a referendum can be held on the split.

That's where we stand right now, and it's also why the Russian markets are panicking. Foreign investors are seeing the crisis as unwelcome uncertainty, and Western leaders have added fuel to the fire by presenting Russia's involvement in the Crimea as the "biggest crisis" of the 21st century.

The fur is flying, but the bullets aren't
For all the sensationalism, however, there is no war in the Crimea. Russia's deployment all but cements Crimea's secession from the Ukraine, and it is unthinkable that Ukraine's relatively small military, a good chunk of which has defected to the Crimea, is going to try to retake the peninsula by force. The bullets aren't flying, and there's no reason to think that's going to change. 

Whatever one's opinion of the secessionist movement itself, this is as unstable as the situation is liable to get, fresh off a regime change in the Ukraine and new troop deployments from Russia. Much of the European Union, and Britain most notably, are opposed to economic sanctions against Russia for their deployment, and American "punitive actions" are shaping up to amount to very little economically.

The value of Russia
Britain isn't opposing sanctions on some high-minded principle: There's a lot of money at stake here. London is a major hotbed of Russian investment, and the Conservative government sees no reason to threaten that for some symbolic measure that isn't going to change things on the ground. 

The rest of Europe may not have London to worry about, but they have something else. Russia is a huge energy provider for Europe, providing fully one quarter of the natural gas to the entire continent. With much of the region's energy already cut off by sanctions (in the case of Syria and Iran) or instability (in the case of Libya), they can't afford to risk those ties.

Panic selling means bargains
The panic selling that sent Russia's markets down so severely ignores the reality of the situation, and Russia's economy is unlikely to feel any major pain from the Crimea. This is doubly true of Russia's oil and gas majors, which Europe simply needs too badly to cut off.

That's a chance to get in on the cheap, and two companies stand out. The first, OAO Lukoil (NASDAQOTH: LUKOY  ) , is a major oil producer with production centered in Western Siberia, well away from the Ukraine mess. After weeks of panic selling, the stock is bargain priced around $50 per share, putting it at about five times its extremely stable earnings and about 0.5 times book value. Good margins and a solid balance sheet should support a price of $70-$80 a share, and it is only overreaction to the Crimea that is providing such a juicy opportunity.

My favorite of the bunch, however, has to be OAO Gazprom (NASDAQOTH: OGZPY  ) , which is both a major oil company and a natural gas company. It would be more fair to say it is the natural gas company, as Gazprom is the world's largest. The company is so big it makes up about 10% of Russia's GDP.

Gazprom is also cheap beyond all reason, floating around $7 a share at 2 times earnings, 0.25 times book, and with even better margins. The current ratio is over 2, and this is a market leader with an enormous ability to generate free cash. 

Gazprom is directly involved in the Ukraine, in Belarus, and elsewhere in the unstable region, and that may justify a bit of an uncertainty discount, but at the end of the day, the price is ridiculously low and its percentage of the market makes it virtually irreplaceable across much of the Western world. 

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  • Report this Comment On March 06, 2014, at 12:47 PM, ghouri wrote:

    This is not the time for sanctions as the world economy will suffer. If OIl prices shoot up thrn it will be desaster. American,s have no logic but sanctions and think is granted to invade other countries only on lies to control hydrocorbons.

  • Report this Comment On March 06, 2014, at 3:16 PM, DrGoldin wrote:

    Relax, ghouri; the U.S. isn't talking about invading Ukraine. The only country that might invade Ukraine is ... Russia.

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