The common shares of buy-recommended Lukoil Oil Company (LUKOY.PK) offer unlevered appreciation potential of 54% to estimated net present value [NPV] of $134 a share. In fourth quarter 2007 results reported on April 10, unlevered cash flow (Ebitda) exceeded our projection by 39%.
The two-month lag in the application of the crude oil export tax made results look better, at least temporarily. Some of the gains may stick as the Russian government promises to ease up on the tax. Lukoil’s fourth quarter volume decline is symptomatic of overall Russian oil production decline as a result of the tax.
In any case, projected volumes along with current futures prices promise a continuing high level of unlevered cash flow (Ebitda). NPV is well supported by projected cash flow capitalized at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P). We remain optimistic about economic and political progress in Russia and its implication for the value of Lukoil stock.
Originally published on April 10, 2008.