Meeting with Novatek: Starting with a Share Buyback Announcement
As of March 14, 2014 (the last business day before our meetings), Novatek’s year-to-date share price was down approximately 25%, a significant drop before the end of the first quarter.6 Generally speaking, the Russian energy sector7 was down a similar amount over this same period and traded at below five times earnings.8
If a company believes its share price is undervalued, one effective use of corporate cash is to initiate a share buyback program, such as the one Novatek announced on March 17, 2014. The company’s buyback program began on June 7, 2012. Novatek tends to initiate share buybacks at varying amounts over 3- to 4-day intervals, according to a study on the company’s investor relations website. At no single point between June 7, 2012, and March 11, 2014, did Novatek repurchase an amount greater than one million shares during one of these 3- to 4-day intervals . However, according to the March 17 announcement, from March 11 to March 14, Novatek bought back 2,476,250 shares.9 The share buyback program and especially its relative size reflect the confidence of Novatek’s board of directors in the fundamental value of the firm.
Surprise! Novatek Has No Direct Government Ownership
Many Russian firms have large, direct state ownership stakes, but Novatek actually has no Russian government ownership10—a big contrast to Gazprom, which is majority-owned by the Russian government. Novatek’s dividend policy is a function of the company’s own judgment and not determined by a majority government shareholder.
Novatek’s Dividend History
Looking at Novatek’s dividend history, the cash dividend, measured in rubles, has increased over the course of each calendar year since 2009.
During our meeting, the company representative expressed his view that the dividend is important—it has been growing, and he didn’t see a reason at this time why that trend couldn’t continue.
Conclusion: Any Risk to Novatek’s Ongoing Operations?
The development of new fields as sources of oil and natural gas and the construction of facilities to improve the efficiency of the firm’s existing fields generated the greatest excitement during the meeting with Novatek. Each aspect of the presentation was designed to emphasize that natural gas sells for approximately $4.50 per 10,000 British thermal units (BTUs),11 whereas oil sells for approximately $106 per barrel.12 The more that can be done with the liquid elements that are, in essence, somewhere between gas and oil, the higher the profit margin that Novatek is able to earn and the more cash the company is able to generate. The big point was that Novatek’s expansion plans are much more focused on liquids than on gas.
A critical question, today, is what the company views as the main risks relating to its ongoing business. Share buybacks and dividends are all well and good, but keeping the firm running is first and foremost. The Novatek representative emphasized that he’d been living in Russia for 20 years, and his view was that things like this current disruption tend to happen, but that in the past, they’ve tended to represent significant buying opportunities where share prices of otherwise strong businesses are depressed. A factor that was cited as a potential risk was the fact that European banks were definitely involved in the financing of Novatek’s new projects, so, depending on the nature of any EU sanctions, these financing channels could potentially face delays. However, he did mention the potential for China to step in and offer funding, should this occur. All in all, Novatek was confident as of March 17, 2014, that business would be able to continue.
A Great Time to Meet with Individual Russian Firms
We appreciate HSBC’s allowing us to attend their CEEMEA Investor Forum in New York. We learned a lot and look forward to participating in similar future events that can help us better understand some of the constituents of our Indexes.
Unless otherwise noted, source is Bloomberg, as of 3/19/2014.
1Central & Eastern Europe, Middle East & Africa.
2Gazprom’s weight equaled 5.25% of the WisdomTree Emerging Markets Equity Income Fund (DEM) as of 3/19/2014.
3Novatek’s weight equaled 1.40% of the WisdomTree Emerging Markets Dividend Growth Fund (DGRE) as of 3/19/2014.
4International Financial Reporting Standards (IFRS): A set of accounting standards, developed by the International Accounting Standards Board (IASB), that are becoming the global standard for the preparation of public company financial statements.
5Source: Moshkov, Maxim & Constantine Cherapanov, CFA. “Gazprom: Conservative DPS Outlook Despite Record Earnings,” UBS Global Research, 3/4/14.
6Source: Bloomberg, from 12/31/2013 to 3/14/2014.
7Refers to the MSCI Russia Energy Index.
8Refers to the P/E ratio of the MSCI Russia Energy Index as of 3/19/2014.
9Source: “Novatek Resumes Share Buyback Program” news release, dated 3/17/2014, and Share Repurchase Program history available on company’s investor relations website.
10Source: 3/17/2014 meeting, confirmed by Bloomberg as of 3/19/2014.
11Refers to the price of a futures contract, which is an agreement where parties agree to deliver or purchase a set amount of natural gas at a date specified in the future.
12Refers to the price of a futures contract on specifically Brent crude, where parties agree to deliver or purchase a set amount of natural gas at a date specified in the future.
Important Risks Related to this Article
There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Funds focusing on a single sector generally experience greater price volatility. Investments are focused in Russia, Ukraine, Crimea and China, thereby increasing the impact of events and developments associated with those regions, which can adversely affect performance. Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation, intervention and political developments. Due to the investment strategy of the Funds, they may make higher capital gain distributions than other ETFs. Please read each Fund’s prospectus for specific details regarding each Fund’s risk profile. Dividends are not guaranteed, and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.