vk.com/id446425943 |
Lukoil |
Russia |
|
Energy: Integrated Oil & Gas |
|
Overall, we estimate that the new regulation launched in 2019 might decrease Lukoil’s EBITDA in 2019F by some USD 323mn under our base case macro (USD 57/bbl, RUBUSD 67) mainly due to the negative effect of the damper mechanism and negligible positive impact from the introduction of EPT. Moreover, a wider Urals-Brent spread might increase the company’s EBITDA USD 179mn in 2019, as the effect of lower feedstock costs for the downstream segment is going to outweigh selling prices, given that Lukoil has relatively high exposure to the former (see our Russian Oils Downstream – The Metamorphoses; Fall of the Gods and Russian Oils Upstream – The Metamorphoses; Rise of Titans, both of 5 October). At the same time, lower HSFO prices amid the upcoming IMO restrictions on marine fuel would provide for a USD 120mn negative impact on Lukoil’s EBITDA in 2019 due to the company’s 15% exposure to high sulphur products. All together, the tax changes coupled with the external regulatory amendments might provide for a combined effect of -USD 264mn on Lukoil’s EBITDA in 2019, we estimate.
Figure 18: Effect of changing taxation and IMO regulation on Lukoil’s 2019 EBITDA (USD 57/bbl, USDRUB 67)
USD mn |
|
Taxes |
|
|
|
IMO |
|
Combined |
% of |
Company |
Tax maneouvre |
Damper |
EPT |
Total |
Urals |
HSFO |
Total |
effect |
EBITDA |
Lukoil |
-143 |
-208 |
29 |
-323 |
179 |
-120 |
59 |
-264 |
-1.8% |
Rosneft (inc. Bashneft) |
-179 |
-257 |
629 |
193 |
354 |
-464 |
-110 |
83 |
0.3% |
Gazprom Neft |
38 |
-164 |
1,056 |
930 |
133 |
-126 |
8 |
937 |
14.1% |
Surgutneftegas |
23 |
-31 |
193 |
184 |
31 |
-95 |
-64 |
120 |
2.0% |
Tatneft |
-23 |
14 |
0 |
-9 |
-15 |
0 |
-15 |
-24 |
-0.5% |
Total |
-284 |
-646 |
1,907 |
975 |
682 |
-805 |
-122 |
852 |
1.4% |
Source: Company data, VTB Capital Research
Valuation
Lukoil is the best performer on the Russian equity market YTD, outperforming the broad RTS Index and RTS O&G by 9% and 14%, respectively. We think this is partially driven by the ongoing USD 3bn buyback.
Figure 19: Lukoil increased 19% YTD
25% |
|
|
20% |
|
|
15% |
|
|
10% |
|
|
5% |
|
|
0% |
|
|
1-Jan 8-Jan 15-Jan 22-Jan |
29-Jan 5-Feb |
12-Feb 19-Feb 26-Feb 5-Mar 12-Mar |
RTS |
RTS O&G |
LKOD LI |
Source: Bloomberg, VTB Capital Research
Lukoil currently trades at 2019F EV/EBITDA of 4.1x (4% discount to Russian Oils) and P/E of 8.3x (36% premium to Russian Oils) under our conservative view on the oil price of USD 57/bbl.
15 March 2019 |
16 |
vk.com/id446425943 |
Lukoil |
Russia |
Energy: Integrated Oil & Gas
Figure 20: Lukoil is trading at a discount to peers on EV/EBITDA and premium on P/E under USD 57/bbl 2019F oil
Company |
|
EV/EBITDA |
|
|
P/E |
|
|
DY, % |
|
|
2018F |
2019F |
2020F |
2018F |
2019F |
2020F |
FY2018F |
FY2019F |
FY2020F |
Lukoil |
3.4 |
4.1 |
3.8 |
6.0 |
8.3 |
7.1 |
4.3% |
4.8% |
5.2% |
Gazprom Neft |
3.1 |
3.9 |
3.4 |
3.9 |
5.5 |
4.3 |
8.6% |
6.5% |
8.3% |
Surgutneftegas |
neg |
neg |
neg |
1.2 |
3.6 |
2.7 |
2.6% |
2.6% |
2.6% |
Surgutneftegas pref |
neg |
neg |
neg |
2.0 |
5.8 |
4.4 |
19.1% |
6.0% |
8.2% |
Tatneft |
4.9 |
5.5 |
5.5 |
6.9 |
8.4 |
7.7 |
9.4% |
7.4% |
7.7% |
Tatneft pref |
3.5 |
4.0 |
4.0 |
5.0 |
6.1 |
5.6 |
12.9% |
10.2% |
10.6% |
Rosneft* |
3.7 |
3.5 |
3.1 |
5.8 |
5.0 |
4.3 |
6.5% |
9.6% |
10.6% |
Average Russian Oils |
3.8 |
4.2 |
4.0 |
4.8 |
6.1 |
5.2 |
6.3% |
6.2% |
6.9% |
Gazprom |
2.2 |
2.7 |
2.3 |
2.5 |
2.4 |
2.3 |
6.3% |
6.3% |
6.3% |
Novatek |
12.6 |
14.8 |
11.4 |
19.8 |
15.2 |
13.4 |
2.0% |
0.9% |
1.4% |
Average Gas |
7.4 |
8.7 |
6.9 |
11.1 |
8.8 |
7.8 |
4.2% |
3.6% |
3.9% |
Average Russian O&G |
5.0 |
5.7 |
4.9 |
6.6 |
6.9 |
6.0 |
5.7% |
5.4% |
6.0% |
BP* |
5.1 |
4.6 |
4.6 |
13.0 |
11.1 |
11.0 |
5.8% |
6.0% |
6.1% |
Chevron* |
6.5 |
5.7 |
5.7 |
18.3 |
15.5 |
15.9 |
3.8% |
3.9% |
4.1% |
CNOOC* |
3.6 |
3.8 |
3.6 |
9.3 |
10.0 |
9.1 |
5.1% |
4.8% |
5.2% |
Ecopetrol* |
5.5 |
5.0 |
5.8 |
11.5 |
9.6 |
12.9 |
4.8% |
4.5% |
5.1% |
Eni* |
3.4 |
3.2 |
3.1 |
12 |
11 |
10 |
5.9% |
5.8% |
5.9% |
ExxonMobil* |
7.9 |
6.5 |
6.7 |
18.5 |
14.5 |
15.2 |
4.2% |
4.4% |
4.5% |
ONGC* |
6.0 |
3.8 |
4.0 |
10.3 |
6.1 |
6.2 |
4.3% |
5.8% |
6.0% |
PetroChina* |
5.0 |
5.0 |
4.8 |
14.1 |
13.6 |
12.2 |
3.9% |
4.0% |
4.4% |
Sinopec* |
3.9 |
3.7 |
3.5 |
10.3 |
10.1 |
9.5 |
7.9% |
7.6% |
7.8% |
Total* |
5.0 |
4.6 |
4.7 |
10.7 |
9.5 |
9.5 |
5.2% |
5.4% |
5.5% |
Average International Oils |
5.2 |
4.6 |
4.7 |
12.9 |
11.1 |
11.1 |
5.1% |
5.2% |
5.5% |
Source: Bloomberg, VTB Capital Research, *- Based on Bloomberg consensus estimates as of 12 March 2019
‘Inside out’ approach
‘Inside out’ is the valuation method that we suggest using as a first approach to estimating Russian oil companies in a rapidly changing political, macro and regulatory environment (for more details, see Russian Oils Upstream – The Metamorphoses. Rise of Titans, of 5 October). It is based on our observation that, historically, tax breaks have accounted for 80% of oil companies’ net income and 113% of FCF (before working capital adjustments). In the case of Lukoil, these figures stand at 65% (of Lukoil’s net income) and 109% (of FCF) over 2011-18 (Figure 22). We believe that the unusual complexity of the Russian tax code limits the possibility of a traditional indepth analysis, which has become cumbersome, and often unreliable, due to the lack of information. Instead, we suggest calculating the value of all the tax breaks provided to a company’s assets by the Russian tax code under the current macro and compare it with the EV of the company (the value of tax breaks is calculated as the NPV of the current tax breaks fixed for the future at a 10% discount rate).
The largest contributor to Lukoil’s 2019 FCF increase is the introduction of the socalled damper mechanism together with the organic growth of depletion relief. The FiIanovskogo field is to remain an important source of tax breaks and the entire profitability of the company. One of the main postulates of our ‘inside out’ method is that stocks cannot trade below the value of tax breaks for any extended period. As can be seen from Figure 23, Lukoil entered this period in 2Q18 (together with the entire sector) when the NPV of its tax breaks started to exceed the company’s market cap (which we call an ‘inside out’ incident and deem to be non-sustainable). Although it is impossible to define a stock’s ‘upside potential’ with the ‘inside out’ approach, we believe it reliably sets the floor for a company’s valuation. Although in 2H18 the ‘inside-out’ approach signalled a strong upside potential for Lukoil, it has been realised through the share price appreciation along with the oil price drop, which led to the revaluation of the company’s tax reliefs. We note that under our reserved outlook on the oil price (USD 57/bbl for 2019), the ‘inside out’ does not indicate the tangible undervaluation of a stock price (Figure 21). At the same time, we note that in the current macro environment (Brent at USD 67.5/bbl), Lukoil trades almost on par with the value of its tax breaks (Figure 22. As a result, if oil prices hold at their current levels or appreciate further, we would expect that to be a good driver for the further strong performance of Lukoil’s shares.
15 March 2019 |
17 |
vk.com/id446425943 |
Lukoil |
Russia |
|
Energy: Integrated Oil & Gas |
|
Figure 21: Lukoil’s Enterprise Value exceeds NPV of tax breaks
USD bn
70
60
50
40
30
20
10
0
1Q11 |
2Q11 |
3Q11 |
4Q11 |
1Q12 |
2Q12 |
3Q12 |
Downstream relief
4Q12 |
1Q13 |
2Q13 |
3Q13 |
4Q13 |
1Q14 |
2Q14 |
3Q14 |
4Q14 |
1Q15 |
2Q15 |
3Q15 |
4Q15 |
1Q16 |
2Q16 |
3Q16 |
4Q16 |
1Q17 |
||
|
|
|
|
Negative excise |
|
|
|
|
Floating excise |
||||||||||
|
|
|
|
|
|
|
|
||||||||||||
2Q17 |
3Q17 |
4Q17 |
1Q18 |
2Q18 |
3Q18 |
4Q18 |
1Q19F |
2Q19F |
3Q19F |
4Q19F |
|
|
|
|
|
|
Depletion relief |
|
|
||||
|
|
|
|
|
|
|
|||||
|
Regional relief |
|
Permeability relief |
|
Viscosity relief |
|
Small fields |
|
|
|
|
||||
|
EPT |
|
Export duty relief |
|
Other |
|
Mcap + ND |
|
|
|
|
Source: Company data, VTB Capital Research
Figure 22: In the current macro (USD 67.5/bbl) Lukoil trades almost on par with the value of its tax breaks
|
100 |
|
|
90 |
|
|
80 |
|
|
70 |
|
bn |
60 |
|
50 |
||
USD |
||
40 |
||
|
||
|
30 |
|
|
20 |
|
|
10 |
|
|
0 |
1Q11 |
2Q11 |
3Q11 |
4Q11 |
1Q12 |
2Q12 |
3Q12 |
4Q12 |
1Q13 |
2Q13 |
3Q13 |
4Q13 |
1Q14 |
2Q14 |
3Q14 |
4Q14 |
1Q15 |
2Q15 |
3Q15 |
4Q15 |
1Q16 |
2Q16 |
3Q16 |
4Q16 |
1Q17 |
2Q17 |
3Q17 |
4Q17 |
1Q18 |
2Q18 |
3Q18 |
4Q18 |
1Q19F |
2Q19F |
3Q19F |
4Q19F |
|||||
|
Downstream relief |
|
|
|
|
Negative excise |
|
|
|
|
|
Floating excise |
|
|
|
|
|
Depletion relief |
|
|||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Regional relief |
|
|
|
|
|
Permeability relief |
|
|
|
|
Viscosity relief |
|
|
|
|
|
Small fields |
|
|
|
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
EPT |
|
|
|
|
|
|
|
|
Export duty relief |
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
Mcap + ND |
|
|
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
October_forecast |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Source: Company data, VTB Capital Research
‘Inside out’ cannot, of course, fully replace traditional methods, but we believe it to be reliable as a first approach to defining the floor for a company’s valuation.
Although, as we highlighted in our Russian Oils Upstream – The Metamorphoses. Rise of Titans, of 5 October, higher tax breaks lead to higher sensitivity, Lukoil’s official dividend policy sets the floor for the dividends (it pays out no less than 25% of IFRS or inflated RUB dividends of the previous year).
Figure 23: Given the sensitivity potential dividend yields fall in a large range
|
for 2018 |
|
for 2019 |
|
|
|
USD 85/bbl |
USD 57/bbl |
USD 40/bbl |
Lukoil |
4.3% |
5.2% |
4.8% |
4.8% |
Rosneft |
6.5% |
12.5% |
6.4% |
1.6% |
Gazprom Neft |
8.6% |
13.2% |
6.5% |
2.7% |
Surgutneftegas ords |
2.6% |
2.6% |
2.6% |
2.6% |
Surgutneftegas prefs |
19.1% |
11.2% |
6.0% |
2.8% |
Tatneft ords |
9.4% |
11.5% |
7.4% |
3.6% |
Tatneft prefs |
12.9% |
16.1% |
10.2% |
4.9% |
Bashneft ords |
7.2% |
6.4% |
5.2% |
4.4% |
Bashneft prefs |
7.6% |
6.8% |
5.6% |
4.7% |
Source: Company data, VTB Capital Research
Relatively, we continue to prefer Lukoil among other Russian oils. Our 12-month Target Price of USD 86 implies 5% upside, which means a Hold recommendation for the name. We note the company’s improving corporate governance which, coupled with the transparent dividend policy and launched buyback, makes us look relatively positively on Lukoil (see our Lukoil – 4Q18 IFRS; TP increased, Hold, of 5 March). However, our muted view on oil prices caps the potential upside.
15 March 2019 |
18 |