Russia's largest private oil company Lukoil overtook the state-owned oil major Rosneft in terms of capitalisation on Moscow Exchange (MOEX) on March 27.

Lukoil's shares gained 2.09% and capitalisation reached RUB3.29 trillion, narrowly beating Rosneft’s RUB3.27 trillion and lining up behind gas giant Gazprom’s RUB3.325 trillion, with state-controlled bank Sberbank remaining the leader with a RUB5.7 trillion capitalisation.

Lukoil's new strategy, presented at an Investor’s Day in London on March 23, has been met positively by analysts and investors. The strategy outlined four key goals: organic extraction growth, optimising refining to maximise free cash flow, development of petrochemical segment, and progressive dividend policy.

Prior to the Investor’s Day presentation the company released solid fourth-quarter 2017 earnings that showed a sound free cash flow.

"We believe the company’s ambitions are supported by its lucrative assets base, experienced management team and an improved incentive programme," Renaissance Capital wrote on the company while maintaining a Buy rating with RUB4,400 per share target price.

Free cash flow (FCF) was mentioned in Lukoil’s presentation 26 times (compared with four mentions in Gazprom’s recent investor day presentation) and represents the core focus of its new strategy, the analysts stress.

"One of the presentation slides seems to suggest that between 2018-2027 Lukoil plans to generate circa $130bn of operating cash flow at $50 per barrel oil price (vs our current forecast of $126bn at $55 and spend an aggregate $80bn in capex (vs our forecast of $86bn), resulting in aggregate FCF of $50bn, 25% above our estimate with additional upside potential from Lukoil using more conservative oil price assumptions," RenCap estimated.

Lukoil's presentation "left a very good impression" and "delivered what equity investors like to hear," said Aton Equity that also maintained Buy rating on the company at a target price of $78 per GDR.

Aton also welcomes the conservative $50 per barrel oil price assumption, that should help smoothen the high oil price volatility and will help the company to sustain sufficient FCF to provide a constantly rising dividend. 

"Lukoil has no plans for any large-scale investments into downstream, emphasizing instead maintenance capex in refining as well as cost optimisation and further distribution channel reinforcement," Aton writes, stressing that the company prioritises high-margin upstream output. 

"The newly presented strategy 2027 effectively classifies Lukoil as a conservative and stable company with a highly predictable business that is secure in bad times thanks to a low debt burden, and very limited exposure to risky and capex-intensive projects," the analysts note.

For Aton, the company said essentially everything that investors like to hear from Russian oil majors, namely: "1) No obsession with volumes growth at any price and timeframe; 2). Focus on margins; 3). Conservative and selective capex policy; 4). Lowered exposure to downstream capex in Russia; 5). Increasing and de-facto guaranteed dividends with upside via buybacks; 6). Best practice corporate governance and management interest strongly aligned with minority shareholders."  

Lukoil 4Q17 IFRS highlights
USD mn	4Q16 IFRS	3Q17 IFRS	4Q17 IFRS	Chng, QoQ	Chng, YoY	4Q17FVTB Capital	Diff to VTB Capital	4Q17F Cons*	Diff to Cons
Revenues	22,213	25,135	28,463	13%	28%	26,756	6%	27,102	5%
EBITDA	2,906	3,747	3,831	2%	32%	3,891	-2%	3,835	0%
Net income	739	1,649	2,063	25%	179%	1,878	10%	1,883	10%
Source: Company data; VTB Capital Research. *Consensus provided by Interfax as of 20 March