November 24, 2009

Gazprom (Buy, TP=RUB236.0) - Corporate news - Gazprom could take GDF Suez's 5% stake in VNG Verbundnetz Gas (3p)

Please find below our latest publication:

Gazprom (Buy, TP=RUB236.0) - Corporate news - Gazprom could take GDF Suez's 5% stake in VNG Verbundnetz Gas (3p)
Intriguingly, in a letter to the WSJ on 18 November Nord Stream acknowledged that a ‘major French energy company is also negotiating to join the consortium' – which we think is highly likely to be GDF Suez (Hold, TP €28). In our 5 November report Nord Stream: a strategic pipe for Gazprom...could be part paid by GDF Suez!, we explored the advantages for Gazprom of diverting capex from a low return project, i.e., Nord Stream, and reallocating it to more lucrative E&P projects. We also concluded that Gazprom could achieve an additional advantage by increasing its stake in the German gas market, potentially via an increased stake in VNG.
VNG and Gazprom already have several joint projects: 1) VNG has a 12bcm/year Long Term Take or Pay contract with Gazprom; 2) VNG and Gazprom have a joint storage project in Germany near Bernburg (Saxonia-Anhalt, Germany) that should have a maximum working capacity of 0.5bcm by 2025e. By taking GDF's 5.3% stake in VNG, Gazprom would expand its position in the German gas market. But what could Gazprom give in return for the VNG stake? In addition to a stake in Nord Stream, we believe GDF Suez could seek a long term contract for deliveries via Nord Stream to Greifswald, Germany, mitigating the Ukrainian transit risks.
Target price & rating
We reiterate our Buy rating on Gazprom and RUB236/$8 target price, based on a blend of a SOTP (RUB269) and a DCF (RUB203, beta 1.4 vs 1.5, WACC 9.8%, 1% perpetuity growth, normalised EBITDA margin at 37.5% vs 35.7%e in 09e).
Next events & catalysts
The Nord Stream pipeline will pass through the territorial waters or Exclusive Economic Zones of Russia, Finland, Sweden, Denmark and Germany. So far Denmark, Finland and Sweden have approved construction. With permits pending from Russia and Germany, we believe the permit process should be finalised by end 09 and construction should start in April 10e. For us, the probability of construction is close to 100%, so the longer it takes for GDF Suez to clinch a deal for a stake in Nord Stream, the more expensive it is likely to be… Time is on Gazprom's side.

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