Lukoil a Buy on Dividend Outlook After Oil-Driven Drop, BCS Says

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A selloff in OAO Lukoil, the Russian oil producer that has sunk 20 percent from this year’s high as a rebound in crude prices faltered, is a buy to BCS Financial Corp. on its dividend outlook and discount to peers.

The stock has been unreasonably punished amid political uncertainty while a decline in the ruble “fully offset” volatility in oil prices, according to BCS Financial analyst Kirill Tachennikov, who raised Lukoil to buy from hold. A projected 8 percent dividend yield also makes the stock attractive, he wrote in a research note.

Lukoil’s London-traded shares, which slipped 0.8 percent to a four-month low of $43.20 Monday, sell for 5.8 times projected 12-month earnings, compared with an average multiple of 12.1 among 16 global peers, data compiled by Bloomberg show. A slump in the ruble, which has fallen 11 percent in the past two months, has helped the company, which makes most of its sales in dollars, and lessened the impact of lower oil prices, Tachennikov said.

“You have a valuation discount to peers that isn’t justified, and you have a solid dividend program, one of the highest in the sector,” Tachennikov said by phone from Moscow on Monday. “The market reacted strongly to a decline in oil prices, but the fact that Lukoil still managed to deliver on its promise to maintain its solid dividend program indicates that the company is on a strong footing.”

Dividend Outlook

In addition to oil selling for about 60 percent of its five-year average price, Russian producers have been pressured by international sanctions linked to the Ukraine conflict. The measures, imposed last year after President Vladimir Putin’s annexation of Crimea, exacerbated the impact of a plunge in Brent crude and pushed the country toward what economists forecast will be its first recession since 2009.

On a scale from 1 to 5, Lukoil’s London-listed shares have a consensus recommendation of 4.05, the third-highest among 16 global peers. Ten of 19 analysts advise clients to buy the stock, while nine rate it hold.

Lukoil’s board in April recommended a final dividend of 94 rubles, or $1.66, a share for 2014, making a total payout for the year of 154 rubles, a record high. This compares with 110 rubles the previous year, according to the company’s financial filings.

Lukoil is increasing dividends even after its first-quarter profit fell 60 percent as Brent lost half of its value from last year’s high. The Moscow-based producer has cut spending for this year in response to the decline in oil, trimming expenditures on older Siberian wells and some international projects.

Brent Plunge

“I’m not too optimistic about Lukoil, and I don’t see a lot of upside potential in Russia’s oil sector,” Dmitry Loukashov, an oil and gas analyst at VTB Capital, said by phone from Moscow on Monday. “Lukoil isn’t immune to the challenges the oil sector is facing these days.”

Brent declined 6.3 percent to $56.54 a barrel on Monday, a three-month low, before rallying 1.3 percent to $57.29 at 10:38 a.m. Singapore time. Lukoil’s U.S.-traded shares slumped 2.6 percent to $43.14 on Monday. The Bloomberg Russia-US Equity Index dropped 3.1 percent to 54.49, a five-month low.

“The current oil price is pushing Lukoil to trim its investment program, but Brent at about $60 is not really critically bad for Lukoil as the company is on a strong footing and has the capacity to carry on,” Andrey Polischuk, an oil analyst at Raiffeisenbank ZAO, said by phone from Moscow on Monday. “Lukoil has a chance to show the best results in its sector this year.”

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