Buy-recommended Lukoil (OTCPK:LUKOY) offers unlevered appreciation potential of 130% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of $135 a share. Momentum continues positive with stock price above its 200-day average and the futures prices for oil delivered over the next six years above the 40-week average.
In a strategy presentation accompanying third quarter results released today, Deputy Chief Executive Leonid Fedun disclosed a lower growth target of 2% a year in hydrocarbon volume. Much of the reduction is in natural gas. We liked the previous natural gas potential, but have not given it more than 1% of NPV.
Meanwhile, latest results exceeded our expectation from three months ago helped mainly by higher Ebitda Margin at 18%. Lukoil has reduced costs that help margin while the largest cost remains taxes. The Russian government seems more willing to lower the high rate of tax on oil production by Lukoil and others to encourage new investment.
In any case, our estimate of NPV is justified at the current level of tax with some credit for a long reserve life. Investors are highly skeptical as indicated by a low cash flow multiple (EV/Ebitda) of 3.7 times. Partly addressing those concerns, management expects to increase the dividend payout and to repurchase stock.
Originally published on December 8, 2009.