Lukoil: Domestic Demand Up, Exports Down

| About: PJSC Lukoil (LUKOY)

Buy-recommended Lukoil (OTCPK:LUKOY), with estimated net present value [NPV] of $170 a share, offers portfolio representation mainly in crude oil production and non-U.S. domicile at a low McDep Ratio along with political risk.

Second quarter results reported Friday illustrated the effects of Russian government tax policy to encourage domestic refining of crude oil. Refining and downstream (Other) account for half of strong cash flow and earnings that exceeded our expectations from three months ago. Production profits also increased despite a 4% decline in crude oil volume from the previous year.

Like the blades of a scissors, both rising domestic products demand and declining crude oil supply cut oil available for export to the rest of the world. Citing recent favorable tax changes, the company is moving ahead to add a million barrels a day of new production over the next decade from undeveloped oil fields in the Russian Caspian region. The prospects are across the border from Kazakhstan giant Kashagan under development by an international consortium. Meanwhile NPV is supported by projected cash flow capitalized at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P). At the same time in the early hours after Hurricane Gustav reached the U.S. Gulf Coast on September 1, crude oil price for delivery over the next six years is ranging near the 40-week average of $108.

Originally published on September 2, 2008.