Russian Natural Gas Player is Novatek

By LIAM DENNING

Competing with Gazprom on its home turf is no mean feat. But independent Russian natural-gas producer Novatek hasn't done badly. Since its global depositary receipts debuted in London in 2005, they have risen 175%, valuing Novatek at almost $16 billion.

But the stock now commands a giddy 25 times 2009 earnings, and cracks are showing in the investment case.

Novatek agreed last week to pay $650 million for 51% of an undeveloped natural-gas field from companies linked to Gennady Timchenko's Volga Resources fund. The same week, Volga raised its stake in Novatek to 18.2% and Mr. Timchenko joined its board.

Analysts say production from the field is more than a decade away. The large upfront investment needed risks eroding free cash flow, a major element of Novatek's appeal.

The other element is high growth. Before the financial crisis, this looked secure. Gazprom, apparently struggling to produce enough natural gas to export to Europe, was happy for others to take share in the domestic market.

Suddenly, Gazprom's exports have slumped. Europe faces a slow recovery and wants to diversify its energy supplies. Prospects have dimmed at home. Thane Gustafson at IHS Cambridge Energy Research Associates reckons Russian natural-gas demand could peak in 2015.

Novatek, which can't export, risks being crowded out. Gazprom aside, its other competitors are mostly oil companies producing natural gas as a side product, making it hard to fit output to lower demand.

Novatek's largest shareholder, with a 20% stake, is Gazprom itself. How much protection that offers in a slowing market, however, is far from certain.

Write to Liam Denning at liam.denning@wsj.com