For an international exporter of natural gas, Gazprom(GAZP) has seen its deal of shaky times. More recently, however, Gazprom’s stock price has suffered as a direct result of the conflict in Ukraine. Russia hosts the world’s largest extractor of natural gas, Gazprom, but the Russian government has also been entangled in the political instability in Ukraine for some time. Ukraine’s state-owned natural gas company, Naftogaz has been struggling to pay its bills to Gazprom, introducing a serious risk to an otherwise stable operation. This has lead to Gazprom taking more aggressive business actions by cutting off gas supplies to Naftogaz. So how can Ukraine get the gas turned back on in the middle of winter?
Last weekend Naftogaz made a one-time payment of $15 million to ensure a supply of gas for 24 hours. This staggered payment method is a band-aid on a gaping wound. Naftogaz is pre-paying a small amount for a seriously needed resource in order to keep an entire country supplied with heat. Well, not an entire country. Gazprom has granted exceptional status to rebel-held areas in Eastern Ukraine that keep it from being cut off if Naftogaz continues to fail to pay. The reason they are exceptions is that Naftogaz is not supplying those regions with gas in the first place. For their part, Naftogaz claims that Gazprom is in violation of their winter contract as well. In the midst of all this he-said-she-said between the two gas companies, Ukraine has been trying to get more gas pumped in from the EU. Yes, the gas that the EU is getting from Gazprom in the first place.
What’s Really at Stake?
Speculators disagree on whether this is global economics or economic warfare. Both Naftogaz and Gazprom have deep ties to their respective governments. If we ignore the war-ish situation in Ukraine, we need to remember that Naftogaz owes Gazprom $2 billion. Not getting payment for good sold is a bad business practice, and certainly not one the largest seller of natural gas can allow itself to continue. But another customer has to worry if the gas gets shut off to Ukraine: the European Union. For European countries that rely on supplies from Gazprom, there is a potential loss of natural gas flow to their own countries due to pipelines running through Ukraine. And so it makes perfect sense that the EU is stepping in to mediate discussions between Naftogaz and Gazprom.
The Long and Short of Things
Due to the involvement of the EU in making sure the gas companies play nice, there are better odds that Gazprom won’t be cutting off supplies to them. It also makes even worse business sense to cut off supplies to both Ukraine and the EU. I’m not exactly Putin’s number 1 fan, but much of what I see currently going in between Gazprom and Naftogaz looks like standard business practice when dealing with a defaulting customer. Please don’t try to copy Naftogaz’s recent payment schedule, you may find yourself without gas this winter as well. Until these two boys settle their bills, however, Gazprom stock is going to remain affordable. Don’t pass up a good sticker price on being a partial owner of the top gas producer on the planet.