Lukoil and Russia Ride the Rise of Oil

Apr. 4.11 | About: PJSC Lukoil (LUKOY)

The rising importance of oil in global economic growth is good for buy-recommended Lukoil (OTCPK:LUKOY) and its home country, Russia. By our analysis, Lukoil stock has 105% unlevered appreciation potential to estimated Net Present Value (NPV) of $150 a share, where the McDep Ratio would be 1.0. NPV corresponds to an unlevered multiple of cash flow (PV/Ebitda) at just 6 times, at the low end of the range for large cap companies.

Normally, the longer life of Lukoil’s reserves would justify a premium multiple. Nor does NPV presume much improvement in the untypically low cash flow margin for oil production clocked at 19% in 2010, according to our interpretation of latest results released on March 10 in New York . At the same time, we see increasing alignment of interest between the Russian government and Lukoil and between management of Lukoil and investors in the stock.

Russia has a wide margin for reducing the oil export tax to incentivize Lukoil to reinvest in order to replace the decline in old oil fields, thereby keeping export revenues up for the country and profits growing for Lukoil. Management leaders, President Alekperov and Head of Strategy Fedun, have large holdings of Lukoil stock and are committed to reinvesting and building Lukoil. Vagit Alekperov also “knows where the oil is” having life-long experience in the Russian oil industry beginning from his roots in the historic oil center of Baku. Further certifying his credentials, author Alekperov just published his book on the history of the Russian oil industry, which he signed for us.

Finally, underscoring the prospects in the wake of the tragic earthquake and tsunami in Japan, crude oil price is in an uptrend with the current quote of $101 a barrel for the next six years above the rising 40-week average of $90.

Originally published on March 15, 2011