Buy-recommended Lukoil (OTCPK:LUKOY) offers unlevered appreciation potential of 140% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of $135 a share. Second quarter results released on August 28 exceeded our estimate from four months ago for unlevered cash flow (Ebitda) and earnings. Ebitda margin for exploration and production continued at 25% rather than at the lower level of the past several years.
The volatility of the exchange value of the U.S. dollar contributed to a wider spread between oil price in dollars and costs in local currency. At the same time, the Russian government seems more willing to lower the high rate of tax on oil production to encourage new investment. After latest disclosures, we see oil production making up about two-thirds of NPV. Oil volume up 5% a year in the second quarter may continue to grow through 2013 including large potential increments from the Caspian Sea.
Lukoil independent director, Dick Matzke, former Chevron (CVX) executive, sees oil growth in Lukoil almost unmatched by large companies. While political risk continues as a concern, we are optimistic that the Russian government will see that a positive stock price trend for Lukoil, Russia’s largest company not government controlled, would be a symbol of confidence in the country’s future.
Originally published on August 31, 2009.