Priced below estimated Net Present Value (NPV) of $135 a share, hold-rated Lukoil (LUKOY.PK) offers more appreciation potential measured by the McDep Ratio than all of the stocks outside of Russia in our coverage. Investors’ main concern may be Russian government policy, which during the last two months of 2008 levied such a high tax on oil exports that the company disclosed a loss in its fourth quarter results released on April 7.
The negative impact of a mismatch in timing of the tax was not a surprise, though we had little basis for determining the magnitude in advance. Fortunately, that has been straightened out apparently and profits appear to be flowing again in 2009. At the same time, the export tax indirectly encourages the refining of Russian crude oil in Russia, which has been a profitable growth area for the company.
Projected cash flow capitalized at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P) supports our estimate of NPV. Pointing in the direction of oil price that would spark stock price gains, futures prices for the next six years averaged US$71 a barrel recently.
Originally published on April 8, 2009.