China plans to sign a multibillion-dollar deal to buy Russian gas during a visit by President Vladimir Putin next week despite U.S. pressure to avoid undermining sanctions on Moscow over the Ukraine crisis.

Washington has appealed to Beijing to avoid making business deals with Russia, though American officials acknowledge the pressing energy needs of China, the world’s second-largest economy.

Negotiations that began more than a decade ago had stalled over price. But analysts say Moscow, isolated over its role in Ukraine, faces pressure to make concessions in exchange for an economic and political boost…

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Not much to report from the markets. The Dow up a bit. The Nasdaq down a bit. Gold flat. Twitter got slammed again. Shares in the online “self-expression platform” are down about 50% so far this year. 

Your editor believes he recommended you sell high-flying tech stocks. If he didn’t, he should have. But he does not usually make investment recommendations. He does not do investment analysis. He does not often invest. 

Instead, he waits. And waits. And waits – until a bargain screams so loudly in his ear it threatens his hearing. 

But even at that moment, he hesitates. When something is so cheap it appears to be a “once-in-a-lifetime opportunity” his feet grow cold. 

What’s wrong with it, he wonders? If it’s so cheap, there must be a reason. What do all those people who don’t want it know that he doesn’t? Blood in the streets doesn’t bother him; but what if the next blood trickling down the gutter is his own! 

Then he is delayed and disturbed by the philosophic implications. If there had really been a dollar bill lying on the sidewalk in front of him, surely someone would have picked it up? And if someone had picked it up… it couldn’t still be there, could it? Well then, it isn’t there, no matter what his eyes tell him. 

But what do skittish, panic-prone markets do… except wig out from time to time? And what good are they if coldblooded and steel-nerved investors can’t take advantage of them? And how would they ever get back to normal if all investors took temporary madness as proof of permanent impairment? 

Assuming the market anomaly is still with us by the time this cranial indigestion has passed, we are ready to act. And you, dear reader, are the beneficiary. For today, we give you a recommendation… 

After all, it is Mother’s Day on Sunday. Perhaps Mr. Market is feeling flush with filial fondness for dear ol’ mom. Here he comes… his hands forward and a bright red bow wrapped around his precious gift. 

What is it? Gazprom! 

We are talking about Russia… and specifically about a gift that keeps on giving. Gazprom controls more than 15% of global gas production and reserves. And we expect it is going to be selling that gas for a long, long time. 

Gazprom (which you can buy on the Pink Sheets in the US under ticker symbol OGZPY) has a return on equity of about 13%… and a net profit margin of nearly 30%. By comparison, ExxonMobil has an ROE of 18% and a net profit margin only half as high. 

According to data from Reuters, you can buy ExxonMobil for 13.8 times its 12-month “as reported” earnings. And you can buy Gazprom for just 2.7 times its 12-month “as reported” earnings. 

By this measure, a dollar’s worth of earnings from the US oil major will cost you $13.80. But each dollar of Gazprom’s earnings will cost you just $2.70. 

Does this mean you should expect the share price of Gazprom to go up any time soon? 

Nope. 

For all we know, the entire Russian army stands amassed on the border of Ukraine, and every valve capable of delivering Russian gas to Europe has a pair of hands on it, determined to shut it off. 

Another fact recorded in the book we can’t seem to find, is that next year an inventor will discover a marvelous way to power the world on water – making gas obsolete. And the year after, a report from the FDA will tell us that Russian gas causes people to gain weight – another devastating blow to Gazprom. 

All we know is that some things are expensive and other things are cheap; and Gazprom looks more down than up. Of course, we spend our investment lives looking for assets that are absurdly cheap; when we come face to face with one, we don’t want to duck. 

Regards, 

Bill

Further Reading: Buying “when there’s blood in the streets” is just one of the strategies the ultra wealthy use to grow their wealth. To find out what other strategies they use, Bill’s son Will recently “infiltrated” a meeting of a very elite group of wealthy families in London… in the city’s oldest gentlemen’s club. The secrets Will discovered could help you cross what he calls the “invisible barrier” to wealth. Read on here to find out what Will discovered – and how it could transform your financial situation.

Market Insight:
Crunching Gazprom’s Numbers

From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners

There are as many phony contrarians out there as there are phony Elvises. 

Everyone is a contrarian, until a market panic rears its ugly head. Then most “contrarians” head for the hills along with the stampeding crowd. 

Nevertheless, if you can zig when other investors zag, you have a fighting chance of making some real money in the markets. 

One of the most well-thumbed books on my desk is Contrarian Investment Strategies: The Next Generation, by famed contrarian investor David Dreman, the founder and chairman of Dreman Value Management and a former senior editor of value-based research firm Value Line. 

According to Dreman, 

One of the most obvious and consistent variables that can be harnessed into a workable investment strategy is the continuous overreaction of man himself to companies he considers to have excellent or mundane prospects.

And he offers a related investment rule: 

Buy solid companies currently out of favor, as measured by their price-to-earnings, price-to-cash flow or price-to-book value ratios, or by their high yields.

Let’s look at how some of those value ratios stack up for Gazprom, using figures from Morningstar… 

As Bill reports, Gazprom trades on a trailing price-to-earnings ratio of 2.7. This compares to an industry average of 13.1. That’s a 79% discount to the industry average.

The company, meanwhile, has a price-to-book of 0.3, versus an industry average of 1.5. That’s an 80% discount to the industry average.

And Gazprom yields 5%, versus an industry average of 3.3%. That’s a yield 51% higher than the industry average. 

Of course, Gazprom is Russian. It’s run by cronies of swaggering Russian president and former KGB man Vladimir Putin. And Putin is not shy about using Gazprom as an economic weapon in the Russia-Ukraine conflict. 

But remember: Stocks are cheap because there is fear over their futures. And try as you might, you don’t find bargains without high levels of fear and negative sentiment. 

So, you have a choice: Run away along with the investment crowd. Or recognize the value on offer and buy. 

One important caveat: As Bill mentioned, this isn’t a good investment if you are hoping to make a fast buck. It could take many years for sentiment to turn positive toward the Russian stock market… and many years for Gazprom’s P/E multiple to expand. 

But even if Gazprom’s price-to-earnings ratio moves back inline with its five-year average of 3.8, presuming earnings per share stay consistent, that represents a 46% profit from current levels. 

Is this a comfortable investment? 

Absolutely not. But at Bonner & Partners we see that as a good sign, not a bad one.

Back in 2003, after repeated urging from Don Coxe, the formerly great (but now irrelevant) visionary, we began following Canadian Oil Sands (OTCQX:COSWF)(COS.TO) which was then a Trust and now a Corporation.

We bought heavily. We also became investors in several Oil Sands companies, including Suncor, and actually visited the Oil Sands area – at one point a client was the 2nd largest shareholder in a nearby Oil Sands project. By the time we sold COS in 2008 the shares had peaked at over $60 and our cost basis, thanks to the fat dividend, was actually below $0. We like that.

However, we have never re-purchased COS and we suggest serious potential investors take a peek at this note as there appears to be some confusion:

1. Syncrude is bitumen. When an author writes “Syncrude does not suffer from a heavy discount that plagues Western Canadian oil or bitumen” it throws into question the entire analysis, for us at least, since (of course) Syncrude mines low-quality bitumen and then runs it through its $6 billion “upgrader”, in order to produce a pure synthetic crude. This is a capital-intensive and very expensive process which explains why bitumen producers only get in the $50 per bbl. range.

2. COS is a high-cost producer. If there ever is a glaring ‘red flag’ in a company’s presentation, it’s when there exists not one single slide showing actual revenue and net earnings figures, anywhere. The company makes you dig for the numbers instead. In this regards, COS doesn’t disappoint, using plenty of other ‘stuff’ highlighting its “compelling valuation to new mining projects”.

Maybe we are a bit cynical, but that only tells us: “we’ll go broke slower”.

Dig a bit deeper and you will see, for example, that in 2005 net Revenues were $1.93 Billion and net Earnings $831 million (all in $C). Then, by 2012 net Revenues had jumped 91% to $3.7 Billion – thanks to much higher oil prices. So one would logically expect a commensurate increase in net Earnings, however, they came in at an underwhelming 15% increase to $957 million, a significant underperformance. With flat production, we would expect higher oil prices to mean higher profits. Reasonable?

What happened is that costs exploded. Yes, COS does benefit as they own a big-ticket “Upgrader” which adds value over the competition, and Syncrude does get near WTI pricing, which runs at about a $25 premium to bitumen. Yet overall, production costs are still very high.

The only per barrel cost hinted at in the COS presentation is a slide showing EBIT – at $105 oil – with costs running close to $70 per bbl. With COS stating they are seeking to go to $1.5 Billion in long-term debt by 2015, expect further increases in total per barrel cost. Our question is: if costs are going to drop after the big Capex program is completed, why wouldn’t they highlight this in the presentation? It’s not there.

3. WTI prices are going lower. We don’t pretend to be oil price forecasters, but one reliable ‘tell’ of long-term price trends, over the years, has been the oil futures curve. Presently, while February WTI trades at $92, WTI 2 years out sells for $82, 3 years out at $78 and 5 years out it is at $75. There seems to be a trend here, one that does not favor folks expecting a continuation of COS’s 7% dividend yield.

The shift in the WTI futures price curve began this past summer, and we believe it is a quantum, generational, shift brought on by the ‘shale revolution’. Normally, WTI trades at a significant premium in the future – since someone wishing to purchase oil today, at a fixed price, but take delivery 5 years later, should reasonably expect to pay somebody to store all that oil. It varies, but we will say the premium usually runs around $15.

The significance being that 5 years from now, if the futures today are selling for $75, then the market is expecting spot WTI in 2018 to sell for $60.

If so, that’s going to be a bit of a problem for COS and other high-cost producers. Nobody can say for sure, but “price is truth” and anyone considering an investment in COS had better look at the long-term fundamentals and pricing trends.

4. Old technology. While most newer shale producers have a chance to reduce costs via improved technology, COS is going to remain a mostly old-style open pit mine, mined by men with shovels and trucks, big ones indeed, but still capital and labor intensive, with few opportunities for major cost improvement. Since COS talks up their refining capacities, we think investors may be better off looking at them as a more-volatile refiner than a steady, long-life producer.

5. COS management has consistency over-promised but under-delivered. One of the nice things about getting older is you get a chance to look back over many years and see how a company’s guidance works out. We have with COS and have spoken directly to management in the past. We have found them “disappointing”.

This is, naturally, our subjective opinion, and perhaps this time it will be different, but then we are always reminded of the classic “Peanuts” gag where Lucy promises, but then pulls away the football from Charlie Brown. He never seems to learn. We try to.

Hey, I though oil was still near $100?

Final note. I predicted, back in 2003, that Warren Buffett would, one day, invest in the Oil Sands, reasoning such because of the 40-year plus reserve-life index. He finally did buy in 2013… but that was before the dramatic change in the oil futures curve. I would wait to see if he keeps buying.

So far my 2014 expectations are playing out pretty much as planned, with a few adjustments. With the threat of war in the Ukraine I think the final bubble phase in stocks is now off the table. I doubt we can get the euphoric buying pressure necessary to generate a parabola as long as tensions in Eastern Europe continue to escalate. No bubble phase in stocks = no capitulation phase in gold. The Ukraine event was a game changer.

Just to refresh, I predicted we would see an initial rally in the commodity markets during the first quarter, followed by a corrective move into early to mid-summer. Once that corrective move was finished I’m expecting a much more powerful rally in the commodity markets during the second half of 2014.

The initial rally arrived right on cue as the CRB broke through its three-year downtrend line during the first quarter.

I’m pretty confident commodities have now begun that corrective move that I was expecting in early summer. As oil is the main driver of the commodity complex, and it led the CRB out of the 2012 three year cycle low, it is now leading the CRB down into that summer correction.

While the intermediate tops have been erratic over the last three years with no clear pattern, the intermediate bottoms are clearly making higher lows signaling that the three year cycle is still advancing.

While we may get a countertrend bounce early next week I’m not looking for a final intermediate bottom until oil tests its three-year trend line sometime in the next 3-5 weeks.

Barring the manipulation in the metals market last year gold would have printed a similar consolidation pattern as oil. And now that the three-year bear market in the commodity sector is coming to an end the precious metals should also participate during the powerful rally that I foresee for the second half of the year.

Just a little more patience is called for as I don’t think the summer correction in commodities or the precious metals is finished just yet, although I do expect the metals to bottom slightly ahead of the rest of the commodity markets.

Considering the damage that has been done to the physical market by the manipulation last year I believe the biggest gains during the second half of the year will come in the metals and I think traders will get an opportunity in the late May or early June to enter long positions in preparation for the resumption of the secular bull market.

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