'There are no winners from this conflict" was the public verdict of Sergei Lavrov, Russia's foreign minister, on his country's war with Georgia. But what about OAO Gazprom, the Kremlin-controlled energy company?
It enjoys Moscow's patronage and commands nearly a quarter of Europe's natural-gas market. One threat to this dominance in Europe -- a U.S.-backed plan for a competing Caspian pipeline -- has faded amid the sound of gunfire.
Gazprom's big selling point is its resource base: more than 190 billion barrels of oil equivalent, or BOE, by standard Russian measurements, which tend to be generous. Even so, the most comparable measure for Exxon Mobil Corp., total resources, pales in comparison at 72 billion BOE.
Exxon's resources are valued at about $5.40 per BOE, compared with $1.50 for Gazprom. Exxon's proven-reserves multiple is more than $17 per BOE.
Why isn't Russia's supermajor valued like one? On top of the usual Russian risk premium, Gazprom's large reserves are an option on future development, not cash in shareholders' pockets. Gazprom is on an investment spree. Deutsche Bank AG estimates that cash flow from operations will total $173 billion between 2006 and 2010 -- but more than four-fifths of that will be eaten up by capital expenditures. Dividends are minimal.
This would matter less if energy prices weren't under pressure and Gazprom enjoyed a reputation for efficiency. Unfortunately, its track record on cost control is uninspiring.
Gazprom's relationship with the Russian government also is a doubled-edged sword. Gazprom subsidizes the Russian economy. Domestic price controls force it to sell two-thirds of its gas output at less than a quarter of the export price, or $70 per 1,000 cubic meters. The government plans to free the domestic price early next decade, after which it might reach $200.
But with inflation rising, who knows when those plans might be shelved. Assuming long-term domestic gas prices of $110 instead of $200 would knock between 20% and 50% off analysts' estimates of Gazprom's value. Beyond that, the government could always keep price windfalls from minority shareholders by raising gas-extraction taxes.
And then there is the Georgian escapade. On the face of it, the Kremlin saw off the threat of a competing source of natural gas for the European market. But the longer-term upshot is likely to be that Europe's governments finally do something concrete to reduce dependence on Russian energy.
Even those investors optimistic about Russia's transformation into an efficient, market-friendly economy know it will be years before Gazprom realizes its full potential in terms of free cash flow and valuation. The danger is that, in alienating Europe, the Kremlin could undermine its favorite stock's investment proposition.