Lukoil's stock has been on the rise in the last 3 years despite going through cycles in the same period. After having struggled till about end of 2014 due to the fall in oil prices, Lukoil's recent uptick reflects its good 3rd quarter earnings. Revenue has risen by 13% Y-o-Y, while net income after taxes has jumped 76% Y-o-Y. In the Upstream business, while production has increased modestly, the share of higher-margin projects contributing to production has gone up and so have the oil prices.
On the downstream side, refining margins have increased due to weather related disruptions. Throughput is also higher and positive inventory effect. Fuel product sales have also grown across the board. Majority of the debt is denominated in USD and EUR. Hence, Lukoil faces the exchange rate risk, since the RUB has been weakening steadily against USD and EUR over the last 2 years. Besides the growth of the company, dividends are also a very attractive factor for investors, being one of the highest among energy companies globally.
Lukoil's valuation seems low, trading at a P/E ratio of 7x when compared to Rosneft's 17x, while it is higher than Gazprom's 3.58x. The Russian energy sector's industry average is about 9x. We estimate the fair value at RUB 4500. The OPEC cuts will affect CapEx and production for the company in the near future. Lukoil's business is also dependent on oil prices, which are expected to be around $55-$60.
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