Buy-recommended Lukoil Oil Company (OTCPK:LUKOY) reported less cash flow than expected for the fourth quarter of 2006 on April 24 mainly because of the timing of the Russian crude oil excise tax. As explained by Vice President Leonid Fedun on the earnings call, the government adjusts its excise tax on crude oil exports after a two month delay.
The mismatch late last year as oil price was declining should be reversed as oil price rises again. Still Lukoil had a record year and we project cash flow in 2007 that more than justifies net present value of $110 a share.
Mr. Fedun further explains that since Russia’s legacy fields have been mostly exploited, the government is offering lower tax rates for investment in new fields. Chief Executive Vagit Alekperov is proud that Lukoil (70%) and ConocoPhillips (NYSE:COP) (30%) are developing a 500 million barrel field expected to produce 150,000 barrels daily by 2009.
Noting that the government is also encouraging natural gas investment with the staged removal of price controls and without a high excise tax, we add natural gas to our financial models for the company. Lukoil stock has a double weighting in the illustrative McDep Energy Portfolio concentrated on real assets that promise a high return providing clean energy to support global growth.
Originally published on April 25, 2007
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