Russia's independent Lukoil looks to place $1bn Eurobond

By bne IntelliNews October 19, 2016

Russia’s second-largest oil company private Lukoil is considering placing $1bn worth of Eurobonds in the coming two to three weeks, Interfax reported on October 18, citing unnamed financial market sources.

Thomson Reuters division IFR also reported on the possible placement, quoting company sources who said market conditions are seen as significantly improving. Reuters reminded that top executives of Lukoil previously considered a Eurobond placement after more than a three-year break.

“Lukoil is a top-class borrower and investors are long awaiting for its return,” a banking source told Interfax, adding that very low yield on company’s bonds should be expected.

Gazprombank wrote in August that the yield curve for Lukoil’s outstanding bonds “rightfully lies closer to sovereign yields, as the company remains the only investment grade name in Russia’s oil and gas industry and has the lowest leverage in the sector”.

Lukoil last tried tapping the foreign debt market in 2014, but the deal organised by Citigroup and JP Morgan failed amid the erupting geopolitical crisis over Russia and Ukraine.

Lukoil showed net income slipping 2% year-on-year, but rising 46% quarter-on-quarter to RUB63bn ($950mn) in April-June 2016.

The oil major with large overseas extraction operations impressed analysts with its strong cash flow generation and improved decline in revenues, but showed slightly underperforming earnings.

Lukoil’s revenues in the second quarter declined by 9% y/y (but rising 14% q/q) in ruble terms to RUB1.34 trillion ($20.3bn), being 1% above the consensus expectations. While Ebitda declined by 8% y/y to RUB190bn, it was 1% above the consensus, but 10% below the estimate of UralSib Capital.

Gazprombank also noted on August 29 that lower contribution from the West Qurna-2 field in Iraq negatively affected the results, while strong hydrocarbon price dynamics with a positive time lag helped to support Ebitda. Lukoil’s Ebitda margin widened 20bp y/y and narrowed 210bp q/q to 14.2% in the second quarter.

“Notably, the company reported stellar FCF [free cash flow] (RUB57bn in second quarter and RUB 93bn in first half of 2016), as a result of which net debt/Ebitda dropped to 0.66x,” Gazprombank stressed.

The company increased its liquidity cushions with the cash balance rising RUB347bn, comfortably covering the short term debt 2.5-fold.

  2014 2015E 2016E 2017E
Financials, $ mln        
Revenues 144,167 94,409 57,625 73,944
EBITDA 15,942 13,380 9,381 11,817
EBITDA margin 11% 14% 16% 16%
Net income 4,746 5,698 6,536 3,801 1,436 4,020
EPS (adj), $ 6.29 5.11 2.01 5.64
Div/share, $ 2.67 2.29 2.55 3.12
Valuation, Gearing and Yield        
EV/EBITDA 2.6 2.9 4 3.3
P/E 5.8 6.7 16.9 6
P/CF 1.8 2 2.6 2.2
Net debt/EBITDA 0.7 0.7 0.9 0.8
Dividend yield 7.30% 6.70% 7.50% 9.20%
Revenues 2% -35% -39% 28%
EBITDA 0% -16% -30% 26%
EPS (adj) -39% -19% -61% 180%
Sector Valuation      
EV/EBITDA 2.3 3 5.1 4.4
P/E 3.9 4.6 9.9 7.5
P/CF 1.5 2.6 4 3.6
Sector Growth      
Revenues -7% -34% -5% 4%
EBITDA -17% -30% -11% 9%
EPS -28% -27% -17%  
Lukoil 2015 IFRS review
  1Q15 2Q15 3Q15 4Q15 QoQ, %
RUB bln          
Revenue 1,440 1,477 1,464 1,368 -7
EBITDA 211 207 213 186 -13
Net income 104 64 189 -65 n/m
OCF 214.5 168.6 234.6 231.3 -1
Capex 154.1 150.8 142.7 159.7 11.9
FCF 60.5 17.8 91.9 71.6 -22
EBITDA margin, % 14.6 14 14.6 13.6 -0.9
Net margin, % 7.2 4.3 12.9 -4.7 -17.6
$ mln         %
Revenue 23.16 28.05 23.25 20.74 -10.8
EBITDA 3.39 3.93 3.38 2.83 -16.5
Net income 1.67 1.21 2.99 -0.98 n/m
OCF 3.45 3.2 3.72 3.51 -6
Capex 2.48 2.86 2.27 2.42 6.9
FCF 0.97 0.34 1.46 1.09 -26
Source: Company data, URALSIB estimates

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