Tuesday, September 30, 2014

10 Most Popular Leveraged ETF

This was published in 2012

Over the past decade, Exchange Traded Funds (ETFs) have gained tremendous popularity due to many advantages and flexibility that they offer investors. Some of the factors point to tax efficiency when compared to mutual funds, cost effectiveness and transparency as well as entry and exit flexibility.
Clearly investors have embraced these factors as total ETF industry assets currently stands at $1.3 trillion after 34% year on year growth as of 30thSeptember 2012 (as published by the ETF Industry Association).
The beauty of these products is that they allow investors to express their views about a particular asset class/economy/industry in the most efficient and cost effective manner, without the worries of a single company blowing up the return. Nevertheless, with over 1,400 products available in the market today, investors are more paralyzed by choice than anything (see Q3 ETF Asset Report: Investors Back in the Market?).
At this point, knowing one’s investment objective, time horizon and risk tolerance becomes top priority. At the same time, knowledge about individual products that they are investing in and their workings also become extremely important.
Most often investors fail to understand the inner workings of certain products that they invest in (especially the complex ones) and end up losing a great deal. For example, leveraged and inverse ETFs can certainly be great money making avenues for day traders or for a very short period of time. However, investors seeking to make money from these instruments by employing a traditional ‘buy and hold’ strategy are seem likely to lose over time (read Three Biggest Mistakes of ETF Investing).
Leveraged ETFs in Focus
Traditionally, leveraged funds provide 2x or 3x the return of the benchmark performance. For example, a fund that provides 2x the exposure will rise by 2% if the benchmark rises by 1%, however, the flip side also holds true. If the index falls by 1%, the ETF will lose 2%.
On the other hand an inverse leveraged ETF bets against the positive movement of the underlying index, usually over a single day. Basically most of these products rebalance at the end of every session and are built to only give investors the corresponding amount of leverage over a single trading period.
This works really well over a short period of time, where the actual compounded positive returns of the fund exceed the standard compounded returns of the index. However, during oscillating markets marked with periods of high volatility, this phenomenon can hurt the investor leading to larger losses than what some investors might initially expect (read Leveraged and Inverse ETFs: Suitable Only For Short Term Trading).
Therefore, in order for the investors to profit from these highly complex instruments it is prudent for them to understand 1) What actually is the product betting on?, 2) How does it plan to achieve returns 2x/3X the index?, 3) How often does it trade on a daily basis in order to ensure tight bid ask spreads?
This last factor, high trading volume which often leads to tight bid ask spreads, is very important for investors seeking to achieve the best price for their trade. For this reason, and given how volatile the leveraged market can be, obtaining a good price can be vital for overall returns.
In the light of the above statement, we have highlighted 10 of the most popular (i.e. with maximum average daily volume) leveraged ETFs that are available to investors.
The following table summarizes the key attributes that are prudent for any investor to consider before investing in these leveraged ETFs. While we have briefly described some of the key attributes of each below the table:
Table 1

Total Assets
Average Daily Volume
Expense Ratio
Leverage Factor
$618.41 million
10.97 million
Russell 2000 Index
$1.57 billion
7.07 million
S&P 500 Index
$1.13 billion
5.97 million
Russell 1000 Financial Services Index
$608.19 million
3.72 million
NASDAQ 100 Index
$311.91 million
2.32 million
S&P 500 Index
$255.05 million
1.55 million
Energy Select Sector Index
$693.30 million
1.55 million
Russell 2000 Index
$980.26 million
1.48 million
Silver Bullion
$215.82 million
Dow Jones Industrial Average Index
$19.81 million
Barclays Capital U.S. 7-10 Year Treasury Index
For investors seeking for a leveraged play on the broad market via large cap basket we have highlighted four products. The ProShares Ultra S&P500 ETF , ProShares Ultra QQQ ETF , ProShares UltraPro S&P500 ETF and ProShares Ultra Dow30 ETF are some of the large cap leveraged ETF which are most liquid.
As is evident from the table above, SSO and UPRO both track the S&P 500 Index. The former seeks investment results that correspond to twice the daily returns of the index whereas the latter seeks to provide 3x the returns of the S&P 500.
Despite having different investment objectives, both of these ETFs charge the same expense ratio of 95 basis points. Both these ETFs use swap contracts to achieve the leverage that they strive for.
It is also very important to note that both of these ETFs are rebalanced at the end of day, therefore generally on intraday basis the ETF returns will not be equal to stated objective of 2x or 3x the index returns (see more in the Zacks ETF Center).
Thankfully, the ETFs provide the cushion of high traded volume and a substantial amount of popularity. SSO has an asset base of $1.57 billion coupled with an average daily volume of 7.07 million shares. On the other hand, UPRO has attracted $311.91 million in its asset base with an average daily volume of 2.32 million shares.
The ProShares Ultra Dow30 ETF (DDM) is the appropriate choice for investors seeking for a leveraged play on the Dow Jones Industrial Average Index. The Dow is by far one of the oldest stock indexes in the world. Its components are price weighted and it consists of only 30 large cap stocks (read Inside the Dow Jones Industrial Average ETF (DIA)).
The ETF has been able to amass $214.96 million in its asset base since its inception back in June of 2006. DDM is rebalanced on a daily basis and provides exposure of 2x the daily returns of the Dow Jones Industrial Average Index. It uses a variety of Index swaps to achieve its stated leverage.
The ETF has an average daily volume of about 518,000 shares and charges 95 basis points in fees and expenses.
Launched in June of 2006, the ProShares Ultra QQQ ETF (QLD) seeks to provide 2x the daily returns of the Nasdaq100 Index. The NASDAQ 100 index includes the largest non financial companies from the U.S. as well as abroad.
The ETF has a fairly large asset base of $608.19 million and charges 0.95% as expense ratio. The ETF enters into swap contracts with different financial institutions to provide the leveraged exposure. QLD also has a very high average daily volume of around 3.72 million shares (see The Apple Effect and Nasdaq ETFs).
Having discussed some of the large cap leveraged ETFs, let’s now focus on a couple of small cap ones.
The Direxion Daily Small Cap Bull 3X Shares (TNA) and ProShares Ultra Russell2000 (UWM) are two ETFs which provide leveraged play on the Russell 2000 index.
The Index measures the performance of the small cap segment of the U.S. equity markets and is a subset of the Russell 3000 index. The benchmark is composed of 2000 stocks which make up roughly 10% of the total market capitalization of the Russell 3000 index.
TNA provides 3x leveraged exposure whereas UWM provides twice the daily returns of the Russell 2000 index. With an average daily volume within striking distance of 11 million shares, TNA is by far the most heavily traded leveraged ETF available in the market. The ETF also exhibits popularity as indicated by its asset base of $618.41 million (see Three Small Cap ETFs with Impressive Yields).
On the other hand, UWM also enjoys a high average daily volume of more than a million shares and has been able to amass around $694 million since its inception in January of 2007.
Also, both of these ETFs utilize index swaps to provide the stated leverage. TNA charges an expense ratio of 95 basis points; however, UWM is slightly more expensive than TNA charging 0.98%.
The financial sector has been one of the top performing sectors this year. It has been pretty much leading the market rally so far this year after a disastrous performance last fiscal year.
The Direxion Daily Financial Bull 3X Shares (FAS) is an ETF that provides a leveraged play on the financial sector. It seeks investment returns that correspond to 3x the daily returns of the Russell 1000 Financial Services Index.
The index includes stocks of financial services companies from the entire spectrum of market capitalization (read Inside The Top Zacks Ranked Financial ETF). With an asset base of $1.13 billion, FAS is one of the most popular leveraged financial equity ETFs. It charges investors 0.95% as expenses, and on an average does about 5.97 million shares daily.
The Direxion Daily Energy Bull 3X Shares (ERX) provides a leveraged exposure on the energy sector. It strives for 3x the daily returns of the Energy Select Sector Index, which measures the performance of companies from the oil and gas, consumable fuels, oil and gas equipments and services etc.
ERX aims for the leverage by entering into index swap contracts with different financial institutions. It charges an expense ratio of 95 basis points and does about 1.55 million shares daily in volume. It has an asset base of $255.05 million (read Uncertain about the Economy? Try Market Neutral ETFs).
The ProShares Ultra Silver ETF (AGQ) seeks 2x the daily returns of silver bullions which are U.S Dollar denominated for London delivery. This means that along with the volatility in the individual commodity price, the ETF will also be subject to currency exchange rate between the U.S Dollars and the Pound Sterling.
Obviously being a leveraged ETF the fund takes long positions derivative instrument like silver futures and enters into silver forward contracts with different financial institutions to gain leverage on the underlying asset class (i.e. silver bullion).
The ETF is also rebalanced daily and charges investors 95 basis points in fees and expenses. AGQ has a fairly large asset base of $980.26 million and an average daily volume of about 1.48 million shares.
ProShares Ultra 7-10 Year Treasury (UST) is a daily rebalanced leveraged long ETF which is designed to generate 2x the daily returns of the Barclays Capital U.S. 7-10 Year Treasury Index. The index measures the performance of intermediate term Treasury bonds which have a residual maturity ranging from 7 to 10 years.
Most fixed income ETFs, especially long dated Treasury bonds, have seen tremendous rally in the recent past mainly thanks to the risk aversion of investors fuelled by the Eurozone debt crisis and concerns over global economic slowdown. The Federal Reserve’s ultra low interest rate policy is also responsible for attracting investor appetite towards these instruments.
However, from the third quarter onwards, investors have started to show interest in the ETFs from riskier asset classes and high yield bond ETFs for higher current income thereby reducing the demand for the lower yielding Treasury bonds.
This has caused massive asset outflows from the Treasury Bond ETFs and negatively impacted the intermediate and longer dated Treasury Bond ETFs within this time frame (read Long Term Treasury ETFs: Ultimate QE3 Play?).
Nevertheless, this seems to be a short term phenomenon as it is quite evident from the Fed’s actions (such as Operation Twist) that the low interest rate scenario, especially in the Treasury bond front, is most likely to remain for quite some time.
Investors could go for a magnified exposure to the 7 – 10 year Treasury bond segment should consider UST for short term trades. The product has around $20 million in its asset base and on an average does a good daily volume of around 476,000 shares. It charges an expense ratio of 95 basis points.

Tuesday, August 19, 2014

2014 Aug YTD

YTD Performance up 15%, cash 7%

Sold off WynnMac as its PE was abit stretched... should have realised it much earlier.... and abit apprehensive of China property market/economy as a whole.

Sold off Gazprom.... again due to US market emotion ....have to control.

Sold of Vicom...high PE recycle into CES

Valuetronics took up top spot due to its low PE (7+), high dividend yield (6%) (investor friendly), cash and no debt, good business (LED segment mass production which should continue to grow albeit lower margins due to price sweet spots and government push)

MTQ slided 20% since its top due to its poor results. Continue to hold as the sub-sea segments is delayed. And as last year, the sub-sea is contract based usually for 2 quarters. Is important to have good competent management , and also management which look after minority shareholders.

Continue to hold Great Eastern. Will be a beneficiary of OCBC purchase of Wing Hang w/o taking a hit on its B/S (OCBC)...great company.

CES & LKH ...obviously undervalued

Zagro...Hold...bad 1st half performance..trading at NAV...and MS bought at around current price.

Spindex , Cheung Who and Spindex.... low PE... and manufacturing is recovering.

1 Valuetronics
3 Great Eastern
4 ChipEngSeng
8 Spindex
9 Cheung Who
10 Fischer
11 Boustead

Reflections on Investment last 10 years

Some reflections of  my last 11-12 years investments performance. 
IRR respectable 24% but could be much much better.

FY06 was extremely good which probably won't be repeated as the portfolio was heavily stacked on 1 stock.
FY09 / FY10 /FY11 /FY12 was when I was extremely busy for various reasons and no time to evaluate investment positions.

Of cos I started my investment journey way back in 2001 when I was starting a dot-com (which failed) and dabbled in US shares, options, shorting which was completely disastrous. It was only after several reading up of investments books, understanding business fundamentals, industry fundamentals, investment fundamentals and spending time reading/evaluating business/investments/  did I adopt a more rigid and discipline approach to investing. It was also in 2003 that my Dad gave me a lump sum of money to start investing.

Going forward with the size of my portfolio, it will be much harder to repeat such performances. Many penny stocks in Singapore do not suit me as especially this year where my investment was wrong, I could barely exit my position without taking a v big hit (Food empire).

Looking back at each year's end portfolio, if I were to maintain those positions, it would have severely underperformed my current portfolio. My portfolio is quite actively managed (good & bad) . The good is I can switch to better performing business , but the bad means sometimes (emotions take charge) and I lose very very good positions (eg. Visa , APB , CerebosP, NDAQ).

To continue double digit performances,
1) I need to spend more time reading on businesses / investments / research etc which I feel right now I still have not done enough.
2) Businesses which are excellent, I have to have enough conviction and patience to continue to hold through a bad trough.
3) Businesses which I have bought stocks on the US market, several times I have been emotional affected due to the late nights (inadequate sleep - VISA, Gazprom) etc. Therefore I have to maintain a greater disregard to the stock market movement (not the business)

I am again facing a cross roads with my career. My colleagues (who are not as capable and have not proven themselves) are moving up while my position have been stagnant. End of the year, the company is restructuring again. I am contemplating whether I should move on......

The good thing about this company is that it has more flexible hours, near my place and when it is off peak, I have sometime to do my analysis. However I cannot stand incompetent people (younger than me also) moving further up higher than me.....

I do not blog regularly currently as with 2 young kids (have to spend time to teach and educate them - the primary school education system is not easy), a full-time job and time to do my investments research.


FY03 1.37  
FY04 0.88  
FY05 1.67  
FY06 2.55  
FY07 1.36  
FY08 0.94  
FY09 1.09 Co Restruct
FY10 1.42 Dad's Condition
FY11 0.79 3 jobs - Dad's company etc
FY12 1.16 Co Restruct
FY13 1.32  
FY14 1.16  
Avg IRR 25.7%  

Monday, April 21, 2014

Being Rich the easy way

Many of us like things to be easy. How about being rich the easy way? Can it be easy? Your parents most probably told you that there's a price to pay to be rich. You need to work hard, sacrifice and have lots of stress to earn a lot of money. That's a lot of hard work. If you want to climb up the corporate ladder, most likely your workload will increase as your pay increases. The amount of responsibility and stress increases as well. But do you know there is a hard way of being rich and there is also an easy way to being rich? Here i'm talking about being rich and not getting rich. You can be rich but not have time or you can be rich but have all the time in the world. The easier way is of course the latter.


The harder way of being rich

In my company, the senior management is always busy. They have meetings scheduled back to back, phone calls to answer consistently, emails to reply even at midnight and a lot to answer for if things doesn't work out well. Sometimes me and my colleagues wondered if its worth it to work so hard just to earn that amount of money? They have the money but do not seem to have the time to enjoy it. This is the hard way of being rich.

The easier way of being rich

What if I tell you there's an easy way to become rich? Now, before i go on further, I have to say I'm in no way implying that getting rich is easy. However, we can make the process get easier and easier towards the end. The key is in making your money work for you. Once money is successfully working for you, your life gets easier and you do not even have to worry about getting retrenched or about not having enough money.

Work for money or money work for you?

Here's the difference between someone working for money and another person letting money to work for him:

A person who works for money can only work to a certain age. The older he gets, the higher chance he would get retrenched. If this person gets retrenched, he has no income and may find it hard to find another job. At retirement age, his income goes to zero and he will have to rely on his savings to survive.

A person who lets money work for him does not worry about losing his job. When he reaches retirement age, he still has income even though he's not working and does not even need to use his savings to survive. This person can retire as long as he wants. On the other hand, the person who works for money can only retire up to the day his savings is depleted. Once that happens, he may have to go out to work again.

This does not mean that we do not have to work for money at all. Yes, in our younger days, we'll have to work for money. But, learn to use the money you work for and slowly let it work for you. Passive income is the money generated when money works for you.
4 ways how money can work for you

By now, you should be wondering how money can work for you. How do you create passive income? Imagine money still coming in when you're travelling overseas or even when you're sleeping? This may be a bit exaggerated but that is the gist of what passive income is all about: Money working for you.

Here are 4 simple ways how money can work for you:

1) Invest in properties
The easiest to understand way to generate passive income is by buying a property and renting it out. The rent you collect every month ensures a constant flow of income for you. The tough part is saving up your money for the first property. It does require a substantial amount of capital.

2) Invest in Stocks
By far this the most common way anyone can generate passive income for themselves. Passive income comes in the form of dividends from stocks. You can start with little money but to build up a strong portfolio, you still need a strategy plus more capital. This investment may seem easy at first but it actually requires knowledge and experience to do well in it. Lifelong learning and patience is the key.

3) Start an Online website or business
The internet is the new age of technology for at least the past 10 years. Many people have created websites which generates income in thousands of dollars monthly. Income can be generated through affiliates program, pay per click advertisement, direct advertisers etc. If you're able to attract traffic to your site, money will surely flow in and advertisers will look you up.

4) Using your talents to create your own intellectual properties
If you have the talent and passion for music, you can consider producing your own music albums. I had a friend who did just that. Or if you have a passion for writing, you can consider writing and publishing a book. I've seen many other bloggers who published their own book. I think its quite an achievement to write a book numbering 200 plus pages. I heard it takes years just to write a good book so its not easy at all but it'll be well worth it once its completed.

There you go. 4 simple ways on how you can create passive income. Well, it doesn't look that simple now but if you work at this direction, then you'll surely be able to generate that passive income which you desire. Most people choose to strive and work hard in their careers but don't know that earned income may be a risk in itself. You may lose your career in just a matter of days especially in our challenging and competitive world now. Don't get me wrong. You still need your career now and yes, do work hard at it. But along the way, learn to use the money you earn and save, to let it work for you. The knowledge of generating passive income will stay with you for the rest of your life. The passive income, generated successfully after years of hard work, will pay off eventually

Success is an Iceberg

I found this very true. People only see the top.... not the hardwork behind it.
There's a Chinese saying: 

Success on stage for 3 minutes; 10 years sweat and toil backstage

Wednesday, April 2, 2014

Portfolio Update Mar 2014 & Gazprom

Have been abit too active, but in summary I have cashed out of WynnM and GoldW and AAC and have bought Gazprom and Jardine C&C.
Had a big loss on Food Empire... Wasn't attentive enough

1              MTQ
2              Great Eastern
3              Gazprom
4              Jardine CC
5              VICOM
6              Valuetronics
7              Sunningdale
8              ZAGRO
9              LKH
10           Lantrovision
11           Spindex
12           Boustead

YTD up 5%

Gazprom: This Oil And Gas Large-Cap Could Yield 10% By 2016

The cheapest large-cap oil and gas company in the world is trading at a 2014 P/E of 3.2 and EV/EBITDA of 2.4, implying 64% and 46% discounts to emerging markets peers. The company trades at a 2015E P/E and EV/EBITDA of 3.0 and 2.2 respectively; a 34% discount to its three-year historic average EV/EBITDA multiple and 19% discount to the three-year average P/E multiple.

Compared to O&G peers on its domestic market, this company trades at a 40% discount on 2015E EV/EBITDA and a 47% discount on 2015E P/E. Compared to international oil majors, this large-cap trades at a 39% discount on 2015E EV/EBITDA, and 2015E P/E shows a 70% discount.

Relative to emerging market peers, this company trades at an average discount on 2015E EV/EBITDA of 44%, and discount on 2015E P/E of 63%. Perhaps its closest EM peer is PetroChina (PTR). Relative to PetroChina, the listed arm of CNPC, we see a 70% discount on 2015E P/E and a 50% discount on 2015E EV/EBITDA.

This large-cap and other DM peers do typically trade at higher discounts on EV/production and EV/reserves operating multiples versus international peers, mostly due to their higher R/P ratios and differences in tax systems.

Until 2011 this company was the most profitable company in the world, dropping to third place for the last two years. Total 2013 net income of approximately $37.5 billion puts this company only behind ExxonMobil (XOM) and Apple (AAPL) in terms of all-out profitability. It is the biggest company in Russia and one of the largest in the world; Open Joint Stock Company Gazprom (OTCPK:OGZPY).

Based in Moscow in the Russian Federation, Gazprom, which was founded in 1993, has quickly become the world's top gas producer. Its major business lines being geological exploration, production, transportation, storage, processing and sales of gas, gas condensate and oil, sales of gas as a vehicle fuel as well as generation and marketing of heat and electric power.

The Company holds the world's largest natural gas reserves, its share in the global and Russian gas reserves accounts for 18% and 72% respectively, and makes up 14% and 74% of the global and Russian gas output. The firm is actively implementing large-scale projects aimed at exploiting gas resources of the Yamal Peninsula, Arctic Shelf, Eastern Siberia and the Far East, as well as exploration and production projects abroad.
(click to enlarge)
OJSC Gazprom Neft (OTCQX:GZPFY) is the oil-producing arm of Gazprom. It's the fourth largest oil producer in Russia and ranked third according to refining throughput. It's a subsidiary of Gazprom, which owns 95.68% of Neft's total common shares. Other affiliated entities of Gazprom can be found here.

Gazprom Neft has been prominently in the news during the last couple of days, with first oil produced in well testing at its Badra oil field in Iraq, with planned commercial production later this year. Recently it started pilot shale oil exploration under its joint venture partnership with Royal Dutch Shell (RDS.A and RDS.B) in Siberia, drilling the first of five pilot horizontal wells this year and next year.

The JV plans multi-stage fractures of all five wells in a bid to tap shale oil potential in the prospective Bazhenov formation, one of the world's largest known shale oil deposits, potentially holding recoverable shale oil resources of 74.6 billion barrels, according to a U.S. EIA estimate. The Russian government has introduced tax breaks to provide incentives for exploration of Bazhenov and other shale plays.

Back to Gazprom, based on the ADR price of $8.20, which is U.S. (OTC) and U.K. (LSE) listed and represents two shares of Gazprom, one share in Gazprom is currently valued around $4.10 or 137 RUB. The ADR's are deposited with The Bank of New York Mellon (BK) and it is possible to convert Gazprom's ordinary shares into ADRs and vice versa.
(click to enlarge)
There are some significant catalysts supporting a retracement of Gazprom's share price, despite big chances on the domestic market, higher taxation, and increased competition on the international front.
A positive export outlook remains as global gas markets remain strong and the outlook is positive. European spot prices are close to Gazprom's LT contract price level. Asia remains the central target of LNG, drawing volumes away from Europe, while the U.S. may see a gas production decline in 2014 for the first time since the shale gas boom began.

The company could sign a contract to supply natural gas to China as soon as the end of this month, after many years of tough negotiations and delays, at least according to CEO Alexei Miller's most recent statement of December 17th. In September, Gazprom and CNPC agreed on the basic terms of an agreement, including volumes, when deliveries should start, payment, etc, but Gazprom failed to secure a price for sales amounting to 38 billion cubic meters (1.3 trillion cubic feet) per year.
The two sides have not disclosed the current size of the gap between Gazprom's offer and CNPC's bid, but in the past it has been at least $50 per thousand cubic meters, a difference of more than $55 billion over time. The international financial media outlets were recently reporting a price range equivalent to $280-$308 per thousand cubic meters at the Russian-Chinese border, but Russian daily, Vedomosti, on Monday reported a higher price range of $360-$400 as a minimum for Gazprom, while also reporting a deal was close. If an impasse remains beyond the Chinese New Year it may take a political decision between Putin and Xi to ultimately seal the deal.
(click to enlarge)
Talking about government intervention, either positive or negative depending on the circumstances, as of December 1st the Russian government ended Gazprom's monopoly on gas export, after a bill was signed that allows other Russian producers to export liquefied natural gas (LNG).
While Gazprom will keep its export monopoly on gas carried through pipelines, the new law will allow other producers like Novatek (OTC:NOVKY) and Rosneft (OTC:RNFTF) to export LNG increasingly as well, in accordance with demand in the international market. Novatek is partnered with CNPC and Total (TOT) in a LNG project in the Arctic Yamal peninsula. Rosneft has plans to build an LNG terminal in Russia's Far East. The only working LNG plant in Russia is located on Sakhalin Island, and is owned by a Gazprom-led consortium including Shell.

The government has also decided it will freeze tariffs on state-regulated services including gas, electricity and railways in 2014, hurting Gazprom's bottom line. The decision is an effort to ease pressure on household budgets and foster growth in Russian economy. Gas and electricity rates, normally raised in July, will not be raised until July 2015, at the level of 2014 inflation. Despite the limitation on tariff growth, current prices do already allow Gazprom to generate profits from the domestic market.

The mineral extraction tax (MET), which is charged on Russian mineral resources including natural gas, gas condensate and crude oil, will rise during the next few years; although the new gas MET formula does provide tax breaks for Gazprom's key gas greenfields, including Yamal, most of East Siberia and the Far East. Transition to the MET formula does add long-term predictability to taxation and links the tax burden to average realized prices. More information on the MET formula can be found here.

On November 12th, 2012, the Russian government approved resolution 2083-R, requiring state-controlled companies to pay at least 25% of International Financial Reporting Standards (IFRS) net income as dividends, and initiatives are already underway to increase dividends to 35% of IFRS net income from 2016. Gazprom's BOD has instructed the management board to get to work on the transition to dividends based on consolidated IFRS results, starting with profit for 2014.
(click to enlarge)
A subsequent increase to 35% of IFRS net income from 2016 onwards may result in Gazprom's dividends more than doubling versus 2013. Gazprom's dividends may well reach 13.7 RUB per share in 2016, yielding an attractive 10% based on current price, certainly amongst the highest levels in the O&G sector.

Gazprom has been rightly criticized for its inefficiency the last several years, the cost of constructing pipelines remains very high, and development of gas fields in East Siberia and the Arctic continental shelf remains a long term goal. All these elements have put pressure on Gazprom. The core of the company's development going forward lies in maintaining the European market while increasing exposure to the Asian market. In the end it also boils down to the powers that be having the determination to further depoliticize and reform Gazprom, as already witness with Rosneft.

The tariff freeze, MET, 25% IFRS dividend rule, and stronger focus on the efficiency of investment projects should incentivize Gazprom to improve its capital discipline and control over operating costs. Higher dividend requirements, as much as 35% of IFRS net income in 2016, may well be an argument in dialog with the government and regulators on taxation of regulated activities, including domestic gas sales and gas transportation services.

Gazprom will have to ensure generation of sufficient cash flow in the medium term, with CapEx as a rule being sufficiently capped. Market-oriented reforms by the Russian government will slowly but surely make Gazprom, and the broader Russian economy, more attractive to foreign investment. In terms of sheer resources the potential is certainly there to be found.


Thursday, February 6, 2014

2014 Investment Jan

Portfolio as of 2014
1. MTQ
2. GE
3. GW
4. Food Empire
5. WYNMac
6. LKH
9. Sunningdale
10. ManOr
11. Boustead