This Energy Major Is Cheaper Than BP!

Despite having bounced back strongly from their June low, shares in troubled oil major BP (NYSE: BP) remain hugely depressed in the wake of the disastrous Deepwater Horizon explosion, trading at a mere 5.7 times next 12 months’ estimated earnings. However, there is a mega-cap energy firm that trades at a big discount to even that multiple: Russian gas producer Gazprom.

Just how cheap is cheap?
Gazprom shares are valued at just 4.2 times next 12 months’ estimated earnings; here is how they stack up against a wider set of international energy majors:

*Based on estimated EPS for the next 12 months. Sources: Capital IQ (a division of Standard & Poor's) and Reuters.

Investing alongside Uncle Ivan
There are some obvious reasons why Gazprom warrants a discounted valuation. When you invest in the largest, most profitable company in Russia, you’re doing so at the pleasure of the Russian government. In this case, it’s not enough to speak of political influence; when push comes to shove, it's closer to outright political control.

Have you seen my corporate governance anywhere?
Even barring any interference from the government, the quality of corporate governance in the Russian energy sector is suspect. Take Sibir Energy, for example, a U.K. company with operations in Russia that Gazprom acquired in 2009. This month, the U.K.’s Financial Services Authority fined Sibir’s former Scottish CEO £350,000 for his role in an eyebrow-raising transaction.

In late 2008, Sibir surprised the market by announcing it would buy $340 million in real-estate assets from one of its shareholders, Russian tycoon Chalva Tchigirinsky. The deal fell through after Sibir had already put up $115 million, and a month later, it surfaced that the company had, in fact, advanced an extra $210 million without disclosing this to other shareholders or its own board. Sibir eventually recovered the funds from Tchigirinsky, but this sort of stuff can only have a chilling effect on investors.

When country risk and stock risk are tied at the hip
Gazprom -- poorly diversified and subject to significant political risk -- reflects the risks of investing in its home market, Russia, although perhaps it is more accurate to say that it is the Russian equity markets that reflect the risks of Gazprom. After all, it is the largest capitalization stock, with a weighting of more than one-sixth in the MSCI Russia index:

Source: ETF provider websites.

The table clearly demonstrates that, among the BRICs (Brazil, Russia, India & China), Russia is the least diversified market by a wide margin.

Russia is cheap
In a first-rate panel on emerging markets published in Barron's this month, two of the three veteran investors in this area said they were overweight Russia. In fact, Antoine van Agtmael, who coined the term "emerging markets" in 1981, said that Russia is the only one of the four BRICs (Brazil, Russia, India & China) in which he is overweight right now. His concise explanation: "Because it's cheap." Mind you, these are not top-down asset allocation calls; these investors focus on individual stocks rather than stock indexes, and stock-picking in Russia requires a significant amount of skill and experience.

Worth a look, but not for everyone
Despite the risks, I think Gazprom could be worth a look-see at these levels; however, I would suggest this to only the most experienced and dedicated investors – this is the type of "investment-speculation" that one must follow very closely. As far as Russia ETFs are concerned, though they may prove to be less volatile than individual shares, investors are effectively betting on the Russian energy sector – even the Market Vectors Russia ETF (NYSE: RSX), which boasts that it has "less emphasis on energy versus competing products," tracks an index with a 39% weighting in the oil stocks.

If you're concerned about the impact of slowing growth and ballooning government debt on the U.S. stock market, there are alternatives for your money. Tim Hanson explains how to make more in 2010.