Gazprom And Hermitage

Gazprom and

Hermitage CapitalShareholder Activism in Russia

INTERNATIONAL CONSULTING

Issue DefinitionEnvironment Analysis

Strategy OptionsStrategy Choice

Action Plan

Issue Definition

Issue Definition

As an Activist Shareholder, How to make an investment in Gazprom?

1

Environment Analysis


Russia posted GDP Growth of

6.4% in 1999, 10% in 2000, 5.1% in 2001, 4.7% in 2002 with Industrial sector posting high growth figures as well.

22

1. Economic Environment in Russia

Environment Analysis 3


$1,000

$2,000

$3,000

1998 1999 2000 2001 2002

$1,834

$1,328

$1,768

$2,096

$2,379

Russia GDP per Capita US$

Source : IMF



0

100

200

300

400

1998 1999 2000 2001 2002

58.93

175.26

143.29

260.05

359.07

Russian Trading System Stock Exchange Index

Source : Russian Trading System


Russia's Economy is heavily dependent on Oil and Natural Gas Industry.

5



Natural Gas Price Oil Price GDP growth rate

0

1.25

2.50

3.75

5.00

1998 1999 2000 2001 2002

Russia GDP Growth Rate and Oil/Gas Price(Rub)

-5.3%

6.4%

10.0%

5.1% 4.7%

10%

5%

0%

-5%

-10%



Russia has the World’s Largest proven Natural Gas Reserves, estimated at 1,680 trillion cubic feet (Tcf).

7



2,516

911

971

1,680

RussiaIranQatarOthers(17 contries)

Top 20 contries in the world, Ranked by Gas Reserves(Tcf) Source : EIA



2. Political Environment in Russia

9

Corporate Governance Reform

Judicial Reform

Cut out bureaucracy

Tax Reform



10

Despite of these effort, Russian Political Risk is still high


1.5

2.5

3.5

4.5

1998 1999 2000 2001 2002

3.53.4

3.1

3.5 3.5

4.04.1

3.94.0 4.0

2.9 2.92.8

2.7 2.7

2.4 2.4

2.1

2.3

2.7

Curruption Perceptions Index(CPI) 1998-2002

Russia India Brazil ChinaSource : Transparency International



20%

40%

60%

80%

100%

80%

62%

48%42%

McKeever Institute of Economic Policy Analysis

Russia Brazil China USASource : www.mkeever.com


http://www.mkeever.com

http://www.mkeever.com


External Environment

Russian economy have grew up with Reform policy of Putin administration.

Energy industry are affect with russian economy.

Despite of these effort, Russian Political and Policy Risks are still high.


3. Analysis of Gazprom

Gazprom is the largest gas producing company in the world.

It controls almost 60% of Russian gas reserves and produces about 90% of Russian gas.



Gazprom is the largest gas producing company in the world.

It controls almost 60% of Russian gas reserves and produces about 90% of Russian gas.

The company is responsible for 8% of Russia’s GDP.


The Company’s ordinary shares rate grew up 10 times,

whereas the price of the American Depositary Shares(ADS) went up by 40% within the period from 1999 through 2002.

Market capitalization of Gazprom grew 2.6 times since 2000.




Russian Stock Exchange

London Stock Exchange

P/E Ratio(Internal)

P/E Ratio(External)

Market Capitalization

Mareket Capitalization/Net Assets

0 5 10 15 20 25

0.41

20.43

16.89

10.93

11.70

24.02

0.21

11.35

9.77

5.16

9.70

15.75

2001 2002Source : www.gazprom.ru/eng


4. Analysis of Hermitage

Hermitage Fund investment to Russian Energy Industry including Gazprom.

The Company has showed good Performance under the developing Russian Economy



Hermitage Performance

Source : www.hermitagefund.com



1.6%11.2%

18.2%

0.5%

49.8%

18.7%

GasOilMiscFinancialsElectric UtilitiesTelecomSector Allocation in December 2002


Internal Environment

Gazprom is one of the important company in Russian Economy

Also Gazprom has grown constantly, but still undervalued

Therefore, Gazprom is “value stock” to Hermitage Fund

Strategy Options

Strategy Options

Stopping Investment in Gazprom

Keeping Current Investment Strategy

Enforcing Shareholder Activism in Gazprom

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Strategy Options 22

Stopping Investment

Investing Other Opportunity

Losing Opportunity in Gazprom

Keeping Current Investment

Strategy

Easy for Fund Management

Nationalization Risk

Enforcing Shareholder

Activism

Being Better Performance

Stakeholder’s Resistance

Strategy Choice

Strategy Choice 23

Undervalued Shares

$3

$6

$9

$12

$15

$0.05

$6.51$6.87

$7.88

$12.20$12.98

$13.68

Comparable Energy Company Valuation, Fall 2000

Exxon Mobil Chevron BP/AMOCO Shell Texaco Conoco Gazprom

Strategy Choice 24

Undervalued Shares

Gazprom’s Shares have undervalued, despite last few years Growth

Strategy Choice 24

Undervalued Shares

Gazprom’s Shares have undervalued, despite last few years Growth

CurruptionLegal

Confusion

Asset-

Stripping

Poor

DisclosureRed Tape

Strategy Choice 25

Browder’s Report

Find Only 10% asset-stripping

Improve the Management

Situation

Pressure

Government

Slow the asset-

stripping

Cause the Shares to appreciate

Shareholder Activism

Strategy Choice 26

Enforcing Shareholder Activism in Gazprom

Keeping Current Investment Strategy

Stopping Investment in Gazprom

Strategy Choice 27

Thinking Point

Was his fund large enough to make a difference to the government?

What about his relationship with Board of Directiors?

What about his relationship with other Shareholders?

How can give more Stability to Stakeholders?

Strategy Choice

Government

Stakeholder

Shareholder

Activism

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Relationship Management

Strategy Choice 29

Enhancing Value Process

Shareholder Activism

Value of the Com

panyShareholder Relationship

Stakeh

older Rela

tionship

Government Relationship

Shareholder Activism + Relationship Management

Action Plan

Action Plan

1. Shareholder Relationship

30

Increasing Control Abilities in the Company through Shareholder Relationship Management

Action Plan


31

Forming the Union with other Foreign Investors

Action Plan


32

Acquiring a Voting Right in the AGM

Requiring change Auditor(11.5% Foreign Companies Share)

Making Issues through Shareholder Activities(Shareholder Meeting, Lawsuit, Appeals to Regulators)

Using PR Campaigns to Emphasize

Non-Russian CompaniesRussian CompaniesThe Russian FederationIndividual Russian Citizens

15.06%

38.37%

35.07%

11.50%

Share Capital Structure 2002

Action Plan


32

Acquiring a Voting Right in the AGM

Requiring change Auditor(11.5% Foreign Companies Share)

Making Issues through Shareholder Activities(Shareholder Meeting, Lawsuit, Appeals to Regulators)

Using PR Campaigns to Emphasize

Increasing Transparency in the GazpromNon-Russian CompaniesRussian CompaniesThe Russian FederationIndividual Russian Citizens

15.06%

38.37%

35.07%

11.50%

Share Capital Structure 2002

Action Plan

2. Government Relationship

33

“Rule of the Man, Not Rule of the Law”

Putin Administration can Heavily affect the Management of Gazprom

Russian Federation has almost 40% shares in the Gazprom

Hermitage Fund has only $650 million under Management

Action Plan


Providing Money for Political Activities

Announcing Putin’s Economic Achievements through Media

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Action Plan


35

Dismantling Ring-Fence System

Increasing Company Transparency

Reform Corporate Governance

Improving Foreign Investment EnvironmentReducing Political Risks

Action Plan


35

Dismantling Ring-Fence System

Increasing Company Transparency

Reform Corporate Governance

Improving Foreign Investment EnvironmentReducing Political Risks

Enhancing the Company Value

Action Plan

3. Stakeholder Relationship

36

Different Stakeholders often have widely varied claims.

Social Interests in Business have been raised

Sometime, There is a Conflict between Stakeholders and Shareholders

Action Plan


37

Shareholder Activism Stakeholder Activism

Action Plan


38

Transparency

Responsiveness Compliance

Substainable Develepment

Action Plan


38

Transparency

Responsiveness Compliance

Substainable Develepment

Maximize the Company Value

Thank YouFor Listening

INTERNATIONAL CONSULTING

Gazprom And Hermitage

Business

Transcript of Gazprom And Hermitage