Gazprom - Hitting the Sweet (Yield) Spot on Strong Gas Pricing and Volumes

We consider Gazprom a key beneficiary of the very tight global gas market environment. The gas forward curve is recovering closer to fundamentally justified levels of around $250/mmcm ($7/MMBtu) much sooner than we had previously expected, while Gazprom has substantial spare production capacity. We have upgraded our 2021-22 financial forecasts and reiterate Gazprom as our top pick in light of its expected high-double-digit FCF and dividend yields, which are the most compelling in the Russian oil and gas sector.> The recovery in global spot gas prices that started in August last year, along with pricing spikes caused by cold weather earlier this year, has helped to shift the forward curve up to $200/mcm. The recent move in European spot prices to $350/mcm with the start of the seasonally weak season pushed the forward curve 30% higher for 2022 and 20% higher for 2023, moving prices closer to $250/mcm, a level we regard as justified by the fundamentals. We raise our average realized export gas price assumption for Gazprom by 18% to $237/mcm for 2021 and by 13% to $250/mcm for 2022 while highlighting that the 2024-25 forward curve is now in line with our long-term price assumptions.> Gazprom's non-CIS gas export volumes jumped 27% y-o-y to 76 bcm in January-early May, while EU and Ukraine gas storage volumes remained close to record lows. Even if Gazprom's gas exports were to remain flat y-o-y (close to the seasonal average) in 2H21 - which could be considered a conservative scenario given the low storage levels - its annual non-CIS export volumes appear set to recover this year toward the 2018 record level of 200 bcm.> We think the combination of robust prices and volumes will see Gazprom's EBITDA almost double this year to $38 bln (also close to the 2018 level), while capex should drop 20% (versus 2018). This should boost FCF after interest to above $10 bln (15% yield), whereas it was negative in both 2019 and 2020. We forecast DPS almost tripling to R35 for 2021, implying a 14% dividend yield.> Based on our upgraded financial forecasts, we raise our DCF-based target price to $5.70/share ($11.40/GDR or R415/share) from $5.30/share. With gas market conditions improving much sooner than we had anticipated, Gazprom's FCF yield (we expect 21% in 2022) could be the highest in the Russian oil and gas sector next year, while we estimate Gazprom dividend yields at 14-16% in 2022-23, even assuming a 50% payout ratio. Our EBITDA and FCF forecasts are a respective 30% and 100% above the Bloomberg consensus, implying significant potential for upgrades.