Russian independent oil major Lukoil shows strong cash generation in second quarter

By bne IntelliNews August 30, 2016

Russia’s second-largest oil producer independent Lukoil showed net income slipping 2% year-on-year, but rising 46% quarter-on-quarter to RUB63bn ($0.95mn) in the second quarter of 2016, according to the company's IFRS report.

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.

“The principal reasons for Ebitda falling short of our forecast was the RUB36bn ($0.55bn) hedging loss, which was higher than we expected, and the lower-than-estimated contribution from the West Qurna-2 project, which made up less than 4% of 2Q16 Ebitda,” the bank commented on August 29, referring to Lukoil’s major extraction operation in Iraq.

Gazprombank also noted on August 29 that lower contribution from West Qurna-2 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.

As Lukoil will only announce the interim dividend recommendation in 2-3 months, the numbers will not directly impact the dividends and will therefore have only neutral effect on the shares, Gazprombank believes.

At the same time, the bank notes that the yield curve for Lukoil 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”.

The recent postponement of oil company Bashneft's privatisation removes or at least rolls back the short-term risk of a one-off spike in leverage on the back of acquisition activity, Gazprombank notes.

Lukoil is one of the main contenders for acquiring the state privatisation gem Bashneft, with which it already operates a joint extraction venture on major Trebs and Titov fields in Russia.

However, the privatisation was abruptly postponed, with Russia’s largest oil company state-controlled Rosneft reportedly ready to bid $5bn for Bashneft.

  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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