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Rye, Man & Gor Securities (RMG) investment consultants raised the fair price of LUKoil stock to $100 per share. LUKoil shares have risen by more than 45 percent in value this year, to about $88 per share, but RMG analysts think LUKoil share prices could rise further by almost a third. Observers attribute this to LUKoil stock being undervalued in terms of financial and industrial terms. But some traders think the company is valued fairly.

LUKoil was Russia’s leading oil producer and refiner last year, with output at 90.1 million tons and refining at 47.28 million tons. Revenue from January to September stood at $40.24 billion, and net profit was $4.8 billion. 20.6 percent of the company’s shares are controlled by management, ConocoPhillips holds 17.1 percent, individual shareholders have 3.9 percent, and other shares are traded on stock exchanged. LUKoil shares have risen in value by more than 45 percent this year, leaving behind the RTS index (up 38 percent), gas giant Gazprom (up 34 percent), and the Russian-British oil group (up 15 percent). But LUKoil was not the biggest gainer, with Bashneft stock climbing 49 percent, Surgutneftegas up 53 percent and Tatneft surging by 70 percent. On Tuesday LUKoil shares were trading at $88.1 per share by 2 p.m. on the RTS, up from 1.15 percent in morning trading.

On Friday last week Rye, Man & Gor Securities (RMG) raised the fair price of LUKoil stock from $64 to $100 per share. LUKoil remains the only vertically integrated company in Russia’s oil and gas sector to be undervalued in financial and industrial terms,” Anton Rubtsov, an analyst at RMG, told RBC Daily. He said the new price was based on LUKoil’s policy of increasing its refining facilities and sales, as well as the company’s recent and planned acquisitions. RMG expects LUKoil’s 2005 revenue to be $57.6 billion, EBITDA at $11.8 billion, and net profit at $7.7 billion. For 2006, revenue is projected to be $60.5 billion, EBITDA is put at $10.4 billion, and net profit at $6 billion.

Rubtsov expects LUKoil to focus on increasing its reserves. “In terms of oil reserves the company is undervalued by about 70 percent compared with foreign oil producers,” he says. Natalya Milchakova, at Otkrytie brokerage, agrees. She thinks LUKoil will increase production by about 6 percent a year from 2005 to 2015, against an average of 3 percent for the country. “Compared with the world’s three leading oil and gas producers, Exxon Mobil, BP and Royal Dutch/Shell, LUKoil’s shares are 40 percent undervalued in terms of production, and by 70 percent in terms of proven reserves. This is not surprising: LUKoil has reserves on par with Exxon Mobil and BP, but it is far behind them in terms of capitalization,” says Taras Buka, at Parex Asset Management.

The company produces 65 percent of oil in Western Siberia, where oilfields are comparatively young and well yields are high, at 44.3 tons a day, Milchakova says. Rubtsov thinks LUKoil will show much better results starting from 2007 and 2008, thanks to new projects. This year LUKoil’s production would be boosted by ConocoPhillips, investing about $700 million in joint projects with LUKoil, she said.

LUKoil’s refining business is also set to grow, Milchakova predicting an annual increase of 6 percent from 2005 to 2015, against the country’s average of 3 percent. “By 2010, LUKoil could become the second largest oil company is Kazakhstan. Only Rosneft could compete with LUKoil, but its shares remain unavailable to investors,” Rubtsov said. “Though expensive acquisitions abroad affect the company’s financial performance, its profits are higher compared with the world’s leading oil producers,” she noted.

Rubtsov does not doubt that ConocoPhillips will increase its stake in LUKoil from 17.1 to 20 percent through the acquisition of the company’s shares on the market. “LUKoil itself plans to buy up to 2 percent of its stock,” he added.

In contrast, Oleg Borisov at Solid investment and financial company thinks LUKoil shares are valued fairly. “In financial terms the company’s shares do not look cheap compared with foreign companies,” he told RBC Daily. Mikhail Zak, with Veles Capital, agrees that in financial and industrial terms LUKoil is valued higher than other Russian companies, but it is behind TNK-BP and Sibneft by capitalization/reserves ratio. He thinks LUKoil’s capitalization could rise to $100 billion this year only if the price of Urals oil reaches $80 a barrel, which is unlikely to happen.

Analytical department of RIA RosBusinessConsulting