Russian Gas: Heating up (Gazprom and Novatek stay BUY)

Both Gazprom and Novatek are pricing in quite a pessimistic scenario for global gas prices, which we disagree with. Contrary to media headlines, we expect gas to be one of the fastest-growing sources of energy and to be of particular importance in the transition to carbon neutrality. Gas accounts for just 7-8% of the total energy use in China and India – the two most populous countries in the world, compared to 24-30% in the EU/US. As a result of the recent gas prices sell-off, only 3mt of new LNG capacity has been sanctioned this year (compared to original expectations of 96mt) and a record (18) number of LNG projects have been delayed or cancelled. The recent price weakness was driven by three key reasons, all of which are temporary, not secular: the warmer winter in Europe and Asia; the record pace of the completion of LNG projects (started in a period of high prices); and the COVID-19 pandemic. We estimate that, in the next five years, the amount of LNG capacity that will be launched (66mt) will be less than half of the capacity added in the previous five years (144mt). We have adjusted our price targets (PTs) for Gazprom and Novatek to USD 6.1/GDR and USD 190/GDR, respectively, to reflect the lower macro parameters in the near term, while we maintain our BUY ratings on both stocks. Besides analysing the price environment, we have also taken a detailed look at the key drivers and cost structures of both companies.