Page 13 - FSUOGM Week 35 2020

FSUOGM PERFORMANCE FSUOGM

Lukoil posts loss in Q2, but

dividends seen as safe

LUKOIL RUSSIA'S second-largest crude oil producer and low yield on the worst first half of the year, but
largest private oil company Lukoil has reported on a more normalised expectation of dividend
Lukoil saw serious its 2Q20 IFRS financials, with revenues of flows.
problems at its Uzbek $13.7bn missing the consensus expectations by BCS GM already conservatively assumes
gas business. 6%. Still, the company's Ebitda of $2bn and net that "Lukoil would pay the minimum 50% of net
loss of $0.3bn outperformed expectations. income set out in its dividend policy for the full
While the financials were low at the net year, and this quarter doesn’t materially affect
income line, the Ebitda was ahead of estimates our full-year net income forecast."
and cash flow numbers are seen as good by BCS
Global Markets analysts. Troubles in Uzbekistan
Free cash flow (FCF) came in at about $0.4bn, In an earnings call, Lukoil's management sig-
better than the BCS GM expectation of approx- nalled an expected recovery of output following
imately zero, albeit down from an average of the OPEC+ cuts applied in May-June, issues with
$2.3bn per quarter the previous 5 periods. The gas production and exports in Uzbekistan, and it
company's capital expenditures (capex) came in reiterated its capex target for this year.
at $1.6bn, down 9% versus the $1.8bn average of Notably, Lukoil was forced to reduce gas
the previous 5 quarters. production at its Gissar field projects in Uzbek-
"As with some of its peers, we think Lukoil istan by 28% in Q1 and by 69% in Q2 versus the
probably hasn’t had time yet to fully adjust its Q4 level due to the decline in Chinese demand
capex plans to account for the [coronavirus] and falling liquefied natural gas (LNG) gas
COVID-19 crisis and OPEC+ constraints from prices.
February, but it appears to be moving in the right "China has recommenced gas purchases from
direction," BCS GM commented on August 28. Uzbekistan, but Lukoil's PSAs are only being
Overall, BCS GM considers the Q2 results as allowed to supply gas to the domestic market
neutral for Lukoil, as Ebitda and FCF are more this year," Sberbank CIB reminds on August 31.
important than a modest net income miss in a The bank warned that "the issues with the
trough quarter. Uzbek PSAs appear to be much more consid-
"At first glance, Lukoil’s Q2 IFRS numbers erable than supposed," while the "collapse in
came in stronger than we expected, with the Lukoil's Uzbek PSA volumes suggests that it faces
reported EBITDA exceeding our forecast by material issues with exports to both countries".
9%," VTB Capital (VBTC) wrote on August 28. VTB Capital (VTBC) on August 31 wrote
But "this was mainly due to the $1.1bn net that Lukoil’s gas production in Uzbekistan was
positive effect of the hedging gain and inven- around 14bn cubic metres in 2019, 41% of the
tories revaluation, which is a one-off item," company’s overall gas output and approximately
in VTBC's view, which warns that other costs 10% of overall hydrocarbon production, with
(operational, distribution, SG&A) showed much about 5 bcm of this is produced at the Gissar
higher cost inflation. field.
"However, Interfax reports some market "As such, we treat the production halt at Gis-
participants were disappointed that the FCF sar and demand disruption at the company’s
numbers pointed to an interim dividend of only Uzbek assets as somewhat negative," VTBC
RUB43-46/share, down sharply from RUB192/ noted.
share paid on 1H19," BCS GM warns. At the same time, the company reiterated its
VTBC also notes that dividend per share capex guidance of RUB450bn-500bn for this
(DPS) for 6M20 is lower than the expected year, up from RUB427bn in 2019.
RUB63, and implies an "intangible" 0.9% divi- Sberbank CIB commented that Lukoil's strat-
dend yield, seen by the bank as rather weak. egy in maintaining high capex "appears to entail
BCS GM the analysts regard sceptical com- prioritising the ability to recover production vol-
ments on dividends as "an overreaction", as they umes quickly, which can be done at the expense
argue that Lukoil's value is not determined by a of FCF generation."™

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