LUKoil Reports Strong 2007 Results

14.04.2008 (12:19) | RBC

LUKoil, one of Russia's largest private oil companies, announced higher than expected results for 2007, reporting a net profit of up to $9.5 billion.

Analysts say this is due to a lower increase in operating costs compared to revenue. At the same time, they point to increased revenue from deeper processing products. In terms of profit margins LUKoil remains behind its closest rival Rosneft, which experts attribute to the latter’s more aggressive acquisition policy.

LUKoil’s US GAAP results for 2007, announced on Thursday, met analysts’ forecasts. Net profit climbed 27 percent to $9.5 billion, $1.5 billion more than the company expected. Revenue also beat expectations, rising 21 percent to $81.9 billion.

According to experts, LUKoil’s EBITDA grew 25.1 percent in 2007 to $15.4 billion, with EBITDA margins up from 18 to 19 percent. Yet, LUKoil still lags behind Rosneft in terms of EBITDA margin and net profit (29 and 26 percent with Rosneft against LUKoil’s 19 and 11 percent, respectively), says Natalya Milchakova, at Otkritie Financial Corporation. Rosneft’s margins were boosted by aggressive acquisitions and a high percentage (61 percent) of revenue from crude oil sales. Seventy-one percent of LUKoil’s revenue comes from oil refinery products and petrochemical products.

On the whole, LUKoil’s figures were in line with expectations, but there were several surprises, says Dmitry Lyutyagin, an expert with Veles Capital. “Mostly, it is about the company’s revenue structure: the percentage of crude oil dropped 4.5 percent, while it had been expected to rise slightly. Retail sales grew significantly, too,” he stressed. Lyutyagin also pointed to the low level of operating costs per barrel of oil, at $3.58.

LUKoil showed good results for 2007, believes Svetlana Savchenko, head of investment planning at 2K Audit-Business Consultations. She said the strong results were partly due to rising world oil prices, especially in the second half of 2007, when oil prices had been growing much faster than export duties. The company invests aggressively in production, which will bear fruit, Savchenko thinks.

Meanwhile, LUKoil’s oil production growth slowed down last year, its output rising by just 1.4 percent against a 12.2 percent increase in 2006. But the company is expected to recoup its losses, given its plans to put the Yuzhno-Khylchuyuskoye oilfield into operation this year. In addition, LUKoil’s capital investment in oil exploration and production grew 41.8 percent in 2007, which should boost the company’s output soon, according to Savchenko.

LUKoi’s investment in upstream projects reduces its disposable cash flow, says Timur Khairullin, at AntantaPioglobal. As a result, LUKoil could be short of cash for 2007 dividend payments, believes Alexander Mokhovoi, an analyst at Yakovlev and Partners. To raise cash, the oil company could issue new shares, sell some of its assets or borrow. “The market is unlikely to welcome new shares or increased debt burden,” he said. LUKoil’s 2007 report gave a boost to its shares, which closed 1.8 percent higher on Thursday.

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