Hold-rated Lukoil (OTCPK:LUKOY) appears to have the resource strength, management capability and political skill to help Russia achieve a positive rate of economic growth in the years ahead and to make money for investors along the way. In third quarter results reported on December 11, oil production reversed the modest tax-inspired quarterly decline with new volumes from the Yuzhnoye Khylchuyu field under development in partnership with buy-recommended ConocoPhillips (COP).
Applying incentives in Russian government tax policy to encourage domestic refining of crude oil, Lukoil earned more than half of cash flow and earnings in the refining and downstream (Other) account. Presuming the company and the government continue to work together, we are projecting little weakness in the growing domestic downstream business. In oil production, we look for next twelve months results to be proportional to volume and global price. We expect mismatches in the timing of excise tax on oil exports and fluctuations in global pricing to be manageable, but would not be surprised at temporary imbalances.
Supported by projected cash flow capitalized at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P), Net Present Value (NPV) is far from current stock price. Meanwhile, any improvement in political relations between the U.S. and Russia, in the wake of a humbling period in the global economy, ought to help the common stock of Lukoil appreciate after a surprisingly steep decline.
Originally published on December 16, 2008.