JPMorgan Says Lukoil Top Russian Oil Pick as Crude Slump Lingers

  • Oil decline is secular rather than cyclical, JPMorgan says
  • The ruble dropped 1.1% to a record low of 77.065 per dollar

The slump in crude prices that has battered Russian stocks and pushed the nation into a recession is going to persist a while, and Lukoil PJSC is the best oil stock to own in that scenario, according to JPMorgan Chase & Co.

Oil, the nation’s largest export, has retreated 17 percent so far this year, following a 35 percent plunge in 2015. Lukoil, Russia’s second-largest producer, has tumbled 41 percent in London trading from last year’s high in May. On scale from 1 to 5, the stock has a recommendation consensus of 4.2, the highest among 15 global peers, according to data compiled by Bloomberg.

In the current environment of low oil prices, which is secular rather than cyclical, investors should focus on companies that have high dividends, keep exploration and production costs under control and have reasonable exposure to operations that turn crude into usable products,  JPMorgan analysts including Sergey Arinin said in an e-mailed research note. Lukoil “ticks all the boxes for 2016,” they wrote.

“We see counting on oil price improvement as risky given that supply-driven oil market imbalance may persist for some time,” the analysts, who rate Lukoil the equivalent of buy, wrote in the note.

After proposing an increase in 2015 interim dividends in October, Lukoil Vice President Leonid Fedun said on a conference call in November that the budget for 2016 envisions “higher dividends.” The downstream, or refining sector, showed stable operating income in 2015 and remains “extremely profitable,” Fedun said at the time.

Stocks Retreat

Lukoil, which said in November that third-quarter net income dropped 62 percent from a year earlier, is scaling back its investment program as oil prices have retreated 54 percent from last year’s high in May. The company’s 2015 budget is based on oil at $50 a barrel, Chief Executive Officer Vagit Alekperov said in December. Brent crude traded for as little as $30.34 on Tuesday.

Lukoil slid 2.1 percent to $29.19 in London Tuesday. Gazprom Neft PJSC, which JPMorgan upgraded to hold from sell, retreated 1.9 percent to $10.10.

Brent crude, the oil grade traders use to price Russia’s main export blend, slid 2.2 percent to $30.86 a barrel. The ruble dropped 1.1 percent to 77.065, a record-low close. The Market Vectors Russia ETF rose 0.6 percent to $13.19 in New York. The dollar-denominated RTS Index slid 0.5 percent, while futures contracts on the index expiring in March dropped 0.9 percent to 69,050 in U.S. hours.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE