Lukoil Cash Pile Mounts Even as Crude Collapse Erodes Profit

Updated on
  • Company helped by gains in Iraq, weak ruble, Gazprombank says
  • West Qurna barrels offset decline in West Siberian production

Lukoil PJSC, Russia’s second-largest oil producer, saw its cash pile triple last year even as profit sank.

Free cash flow totaled 248 billion rubles ($3.7 billion), the company said Monday in a statement. That compares with 76 billion rubles a year earlier, according to Gazprombank JSC analyst Alexander Nazarov, who attributed the growth to gains in Iraq and a weaker ruble.

“Free cash flow was very impressive,” Nazarov said by e-mail. “Lukoil seems to be in a position to increase final dividends.”

The cash pile is a boon to a company that’s seen profit dragged lower by sliding oil prices. Moscow-based Lukoil, which said in November it expected to pay a bigger dividend on 2015 profit than a year earlier, is among Russian oil producers prioritizing shareholder payouts after benefiting from declines in the ruble that reduced costs.

Lukoil is capable of generating free cash and paying dividends as planned with oil at $30 a barrel, billionaire Vice President Leonid Fedun said on a conference call. The board of directors will consider a new dividend policy at an April 26 meeting, he said.

Production Gains

Net income dropped 26 percent last year to 291 billion rubles, Lukoil said in the statement. Oil and natural-gas output rose 2.8 percent to 2.38 million barrels a day as an increase in so-called compensation oil in Iraq countered a decline in West Siberia.

The West Qurna-2 project in Iraq contributed 137 billion rubles to earnings before interest, taxes, depreciation and amortization, up from 117 billion rubles the previous year, according to Lukoil, which said it received almost twice as much oil in compensation for past investments at the field. Once those investments are compensated, the company will receive a per-barrel fee.

“Qurna obviously helped,” Nazarov said. “Lukoil started to get full compensation and stopped large capex there.”

Total capital spending will fall by about 20 percent to 25 percent in dollar terms in 2016, according to Fedun. Capex was 607 billion rubles in 2015, Lukoil said in the statement.

Accounting Shift

The earnings statement is Lukoil’s first to conform to International Financial Reporting Standards, bringing its reporting into line with a 2012 law for publicly traded companies. Lukoil previously published results according to Generally Accepted Accounting Principles. 

The shares rose as much as 3.1 percent in Moscow, and were up 2.4 percent at 2,688.5 rubles as of 6:21 p.m. local time.

Oil prices have tumbled to less than $40 a barrel following a 2014 decision by the Organization of Petroleum Exporting Countries to defend market share amid a worldwide glut. Other Russian oil producers have also been hurt by crude’s collapse, with Rosneft OJSC, the largest, reporting lower quarterly profit last week.

Lukoil recognized 161 billion rubles of impairments in 2015, of which 141 billion rubles were related to exploration and production, particularly in Africa. While Lukoil has had successful drilling results on the continent, projects there aren’t profitable at $30-a-barrel oil, Fedun said. Money written off may be recovered if crude rises back to $50, he said.

In Kazakhstan, the company remains in dispute with the government over cost recovery at the Karachaganak oil field. The state is claiming as much as $1.6 billion from the project partners, Lukoil said in the statement, estimating its own exposure at $214 million. Its press service said separately that talks are continuing and the dispute hasn’t gone to court.