Buy-recommended Lukoil (OTCPK:LUKOY) offers unlevered appreciation potential of 120% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of $135 a share. Most of the unrecognized value lies in oil reserves in western Siberia where the company expects to develop new production to offset normal decline. Lukoil sees volume growth in Kazakhstan, Uzbekistan and Iraq. Control of refining helps the company achieve optimal value for its oil production.
Back on the production side, the switch to reporting reserves conforming to the standards of the U.S. Securities and Exchange Commission reduced the life index modestly, but not enough to change NPV. Meanwhile, fourth quarter results, released along with strategy presentations at the company’s Capital Day in London last week, met our expectation from three months ago for unlevered cash flow from production. Downstream cash flow was stronger than the minimal levels reported by U.S. and European companies in a distressed environment.
Buy-recommended ConocoPhillips’ (COP) confirmation last week that it intended to reduce its ownership of Lukoil to 10% from 20% over the next two years may have a dampening effect on Lukoil stock. Perhaps Lukoil stock price has already adjusted since there was speculation of COP’s potential disposition since it announced plans to sell some assets late last year. In any case, Lukoil stock trends upward with current quote above the 200-day average of $54 a share.
Originally published on March 31, 2010.