In this article, I will compare the stock of Lukoil (LUKOY.PK) to the most well-known integrated major oil companies traded on the western markets: Oil companies such as: Exxon Mobil (XOM), Chevron (CVX), Shell (RDS-A), British Petroleum (BP), and even PetroChina (PTR).
This comparison will focus on the most apparent financial characteristics of each of these companies, such as: (1) price to book ratio; (2) price to earnings ratio; (3) dividend yield; and (4) leverage. Also, insider ownership will be taken into account. I will also comment on possible explanations for what I perceive to be the undervaluation of Lukoil stock.
Price to Book Ratio:
Source: Calculated from most recent quarter's balance sheet divided by market price on 12/21/2012.
As you can see, Lukoil has a substantially lower price to book ratio than all of the other major integrated oil companies. In fact, it is the only oil company in this list that is selling below book value. In addition, unlike BP, it does not have the overhang of environmental liabilities. It also, unlike most of the other oil majors, does not have much goodwill on its balance sheet.
Price to Earnings Ratio:
Source: This fiscal year's net income divided by market price on 12/21/2012.
As you can see, Lukoil also had the lowest P/E ratio. Most other integrated oils, with the exception of BP, trade at P/E ratios double or even triple that of Lukoil. Again, difficult to rationalize.
Source: Google Finance for the dividend yield.
Companies with higher P/E's can have higher dividend yields than companies with lower P/E's if the former pay out a greater portion of their earnings as dividends. That is exactly the case here: since RDS and BP have higher payout ratios, they have higher dividend yields than Lukoil.
Still, Lukoil has a higher dividend yield than Chevron, Exxon Mobil, and is about equal to PetroChina.
Leverage (Debt to Equity Ratio):
Source: Most recent 10-Q's on Google Finance.
Clearly Lukoil is quite conservatively financed, and does not need much leverage to generate its returns on equity.
Lukoil's management, now oligarchs, have had high ownership stakes since the inception of the company in the early '90's. They continue to hold substantial stakes in the company, stakes the size of which are largely unheard of in developed western oil companies. Vagit Alekperov owns 20% of Lukoil shares (market value of about $9.6 billion at current market prices). Leonid Fedun owns about 9% of the company ($4.8 billion at current market valuations). Together they own about a third of the company and so it seems that their incentives are aligned with minority shareholders.
Possible Reasons for Undervaluation:
Although this is conjecture, I suspect that most participants in the equity markets do not have the sort of confidence in Russia's political system that they do in other markets, such as the United States, Europe, and China. It is difficult to foresee whether these concerns are justified. In my opinion, Russia's market and economy is maturing and growing. Although arguably the political system may not be as fair or developed as in other markets, it has served the country reasonably well over the last several decades, and there appears to be no reason why this would not continue into at least the short and medium term future.
Lukoil is an attractive integrated oil major with a quality business, trading at a price below its western counterparts.
Disclosure: I am long LUKOY.PK.