lukoil_iconAs the RSX climbed to a peak in the spring of 2011, so did one the world’s major companies. Russia’s latest round of politically spawned instability has created plenty of opportunities in a list of the country’s biggest companies. Value Investors can take a close look at Neftyanaya Kompaniya LUKOIL OAO, better known as Lukoil (LUKOY.PK). Russian based LUKOY (which trades over-the-counter on the Pink sheets) is the world’s largest privately owned oil and gas company based on proved oil reserves. LUKOY is responsible for roughly 18% of Russian crude oil production. LUKOY’s products are sold domestically in Russia and former USSR republics and worldwide from Eastern and Western Europe to the U.S.

LUKOY is Russia’s second largest oil company and its second largest producer of oil. Headquartered in Moscow, LUKOY is the second largest public company (next to ExxonMobil) in terms of proven oil and gas reserves.

Lukoil plans to invest $48 billion in 2012-14 and aims to spend more than 70 percent of the $13.9 billion earmarked for next year to halt declines at west Siberian units and ramp up the West Qurna-2 project in Iraq.

The Company’s board approved its strategy through 2021 in which they expect oil and gas output to rise at an average of 3.5 percent annually over the next 10 years.

Executive Summary:

LUKOY is a Russian integrated oil and gas company engaged in the business of oil exploration, refining, production and distribution.

Lukoil owns a number of refineries, gas processing, petrochemical plants and gas stations network located within Russia and across Europe as well as assets in the United States.

The Company operates through numerous subsidiaries and affiliated companies in eight business segments:

  • Oil & Gas Production
  • Refining
  • Petrochemicals
  • Petroleum Marketing
  • Services
  • Financial Activity
  • Electric Power Generation
  • Banking

LUKOY Management controls more than half the company float.

Lukoil announced Thursday that its subsidiary, LUKOIL Overseas Cote d’Ivoire Ltd., has made a discovery in Block CI-401. The Independance-1X exploration well drilled on Block CI-401 has penetrated the targeted objective and found a series of good-quality sandstones containing light oil and gas condensate. Detailed information about the discovery will be provided on the phone conference call that will take place on December 12 at 4 p.m. Moscow time.


Overall Valuation:

LUKOY has positive earnings. Therefore, the price-to-sales ratio is less instructive than the P/E and price-to-book ratios. With that, LUKOY appears to be trading at a discount with a P/E value of 3.7474, one of the lowest valuations in the integrated oil and gas sector.


Based on its operating, gross and net margins, Lukoil stock converts an above-average percentage of its revenues to profits compared to its industry peers. The company is profitable with an operating margin of 11.36%.


Lukoil stock currently pays out to shareholders an annual dividend of $3.72 at its current stock price of $50.85, producing a yield of 7.32%. A yield ratio of that amount is considerably above both the oil & gas industry average of 4.35% as well as the average S&P 500 yield of 2.18%.

Financial Strength:

LUKOY’s debt to total capital ratio is 12.72%, in line with the oil & gas industry’s norm. Given the interest coverage ratio of 31.92 and quick ratio (MRQ) of 1.44, the company should be able to comfortably repay its debt.

Quick rundown on Technicals:

Lukoil has been in a steady downtrend channel since hitting a high of $75.98 on March 7, making lower highs and lower lows and producing a distinctive Fibonacci wave to the downside.

Price movement has been using the 150-day moving average as resistance since crossing it back in May with a few failed attempts to break out above it.

The downward price trend can be verified using the 61.8% Fibonacci level as resistance confirming the 150-day moving average level.

Investors may also notice when looking at LUKOY’s chart a reverse or bullish head and shoulder pattern, albeit a small one, forming over the past few weeks.

Volume in the past has ticked above average during the times the bears are in control and pushing price toward the bottom of the trading channel. This is a great indicator to watch for entry and exit points.

Investors can use the average volume as sign that price may be heading to the bottom of the channel to possibly form the right shoulder. The shoulder would be formed at the bottom of the channel and at the natural resting place of 18% and 27% Fibonacci extension levels.

For now, it appears the bears are in control of the stock price and investors should be patient and look for sound opportunities to enter.

A few possible scenarios:

  • Price moves to the bottom of the channel and trades sideways for a few days, forming the right shoulder.  If this should materialize, investors can look for an upside target about 14 points, which would put LUKOY at the top of the channel. An increase of volume may create the possibility of a break above the 150-day moving average.
  • As above, but LUKOY fails to break the channel.  Trade the channel range and make a nice profit on both the long and short side.
  • Price action fails to form the right shoulder and breaks below the trading channel.


When it comes to stocks in the big oil and gas companies, it’s hard to look past the negatives:

  • 2010 Deepwater Horizon explosion that gushed thousands of barrels’ worth of oil a day into the Gulf of Mexico
  • Ongoing push to end government subsidies to big oil firms
  • Continuing questions about the sustainability of fossil fuels and their impact on the environment

All of those are reasons that many investors have been lukewarm on many large energy companies. All are legitimate concerns.

Whether you like it or not, big oil companies are here to stay for quite a while. Alternative fuels have made some inroads in the energy sector but oil and gas remain the dominant players. With many of the big oil companies recently dipping their toes into the alternative energy waters, they have far more capital to put into those efforts than smaller startups.

Russian investments come with a unique, potentially risky, set of political entanglements. LUKOY’s location has probably helped keep its share price down and that’s drawn the interest of many value investors. It fits the criteria as a beaten down stock whose fundamentals indicate they are too beaten down. Considering LUKOY ($48 billion market cap) a contrarian play is simple because its P/E and price/cash flow ratios fall into the market’s bottom 20%. Given that it has a solid 1.96 current ratio, 19.2% return on equity, a dividend yield above the market average, and 12% pre-tax profit margins, it should be getting more love.

Investors may want to consider waiting to see what transpires, both on the technical front and the political unrest currently inflicting Russia.  Look for entry points around the 61.8% Fibonacci support level or after the right shoulder firms up


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