Page 12 - FSUOGM Week 42 2019

FSUOGM INVESTMENT FSUOGM
Lukoil set for new petchem investments
RUSSIA
The investments are unlikely to impact Lukoil’s dividend policy.
RUSSIA’S Lukoil has added two more projects worth RUB300bn ($4.7bn) to its list of planned investments over the next few years, company head Vagit Alekperov was quoted as saying by Interfax on October 18.
The private oil producer intends to take a decision next week on developing a catalytic cracking complex at its oil refinery in Perm, Alekperov told reporters, noting it was likely the RUB100bn project would be greenlit. Lukoil is also considering construction of a RUB200bn petrochemical complex at the site but “at pres- ent no investment decision has been made,” the company head said.
The proposed petrochemical complex would be built by 2025 and feature units for hydrogen production, diesel and gasoline hydrotreatment and alkylation.
“These figures imply a RUB50bn ($0.8bn), or 10%, increase in annual capex versus our current estimate of $7.4-7.5bn for 2020-24,” Sberbank CIB estimated on October 21, warning that the increase in capex spending could reduce the div- idend base. “However, in our view, with annual FCF [free cash flow] now expected at over $10bn (before the new investments under considera- tion), the implications for dividends would not besignificant,”theanalystsargue.
Lukoil also took a final investment decision (FID) on a 500,000 tpy polypropylene (PP) plant at its refinery in Kstovo in August, after earlier suggesting the facility could be placed in Perm instead. Due online in 2023, the plant will sub- stantially increase Lukoil’s PP production capac- ity, currently at 200,000 tpy.
Developing the petrochemical segment was one of the four key goals, which were outlined by Lukoil in London in March 2018 and met
positively by analysts and investors. The others include organic extraction growth, optimising refining to maximise free cash flow, and a pro- gressive dividend policy. Lukoil plans to publish a 10-year strategy for developing its petrochem- ical operations next year, as like other Russian producers it looks to add value to its oil and gas exports.
The company’s investments in Russia have been fair meagre in recent years, with its focus instead on developing overseas operations. On October 15, it took a 5% stake in an offshore UAE oil concession for $190mn, and in the summer, it closed a deal to acquire a 25% interest in a block off the coast of Congo.
The investment case of Lukoil, seen as one of the most valuable Russian oil and gas blue chips has recently been further reinforced by the launch of the second $3bn buyback programme and the pledge to pay at least 100% of cash flow in dividends. In addition, the new downstream investments could be considered in light of the new potential subsidies being discussed within the government, which could offset a substantial part of the additional capex, further minimising the risks to the dividend flow.
Sberbank still estimates Lukoil’s annual divi- dendyieldataround15%in2020-22,eventaking into account the potential petchem investments and assuming no additional buybacks or addi- tional FCF generation from new projects.
BCS Global Markets also sees the news as neutral for Lukoil, estimating that the addi- tional RUB300bn capital expenditure in 2020- 25 undercuts potential FCF by only about 10%, while the market has yet to fully price in the latest dividend announcement implications for 2019-20.™
P12
w w w . N E W S B A S E . c o m Week 42 23•October•2019