A Growth and Value Play

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Although still not a household name like Exxon or Chevron, Lukoil (NASDAQOTH:LUKOY), a company headquartered in Moscow, is the second largest public company in terms of proven oil and gas reserves.  In 2008, the company had over 19 billion barrels of oil on hand.  Lukoil operates in more than 40 countries across the world.  The company is both very large and fast-growing.

A little Bit of History

Lukoil formed in the early 1991 after the Soviet Union came to the realization that the best way for Russian oil companies to compete and prosper was to copy the business models of the United States oil companies.  That meant auctioning off assets that were previously owned by the Russian Government, vertically integrating the three branches of the industry – exploration, refining, and distribution – which were previously separate, and ensuring that that the interests of the Russian Government are still aligned with the class of new oligarchs that emerged.  Collecting taxes provides significant revenues to the Government and it also provides governmental leaders with leverage over the oligarchs should one of them become a threat to those in power (just Google Khodorkovsky).        

How Does Lukoil Stack Up Against Some of the Key Players?

The chart below compares Lukoil to three other companies – Chevron (NYSE: CVX), ExxonMobil (NYSE: XOM), and Total SA. (NYSE: TOT) – across 5 metrics: Revenue per Share, Earnings per Share, Price to Earnings Ratio, Forward Price to Earnings Ratio, and current Stock Price.  Based on these metrics, Lukoil appears to be the clear “winner.”  After all, it has the lowest P/E ratio by a landslide (nearly half that of is competition), the highest earnings per share, the highest revenue per share, and the second lowest price.  Plus the comparatively high revenue per share suggests that Lukoil has the opportunity to further improve its earnings per share and other metrics over time as its operations become more mature and more efficient. 

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>Lukoil (LUKOY)</p> </td> <td> <p>Chevron (CVX)</p> </td> <td> <p>Exxon (XOM)</p> </td> <td> <p>Total (TOT)</p> </td> </tr> <tr> <td> <p>Revenue/Share</p> </td> <td> <p>$174.32</p> </td> <td> <p>$122.29</p> </td> <td> <p>$104.27</p> </td> <td> <p>$104.66</p> </td> </tr> <tr> <td> <p>Earnings/Share</p> </td> <td> <p>12.40</p> </td> <td> <p>12.20</p> </td> <td> <p>9.50</p> </td> <td> <p>6.10</p> </td> </tr> <tr> <td> <p>P/E</p> </td> <td> <p>5.3</p> </td> <td> <p>9</p> </td> <td> <p>9.3</p> </td> <td> <p>8.5</p> </td> </tr> <tr> <td> <p>Forward P/E</p> </td> <td> <p>4.3</p> </td> <td> <p>9.1</p> </td> <td> <p>11.0</p> </td> <td> <p>7.3</p> </td> </tr> <tr> <td> <p>Price</p> </td> <td> <p>$65.30</p> </td> <td> <p>$109.30</p> </td> <td> <p>$87.45</p> </td> <td> <p>$51.45</p> </td> </tr> </tbody> </table>

So clearly Lukoil Is the Best Value, Right?

I am not so sure that is the case. 

On the positive side, the metrics do suggest a compelling value.  And the R in BRIC – a widely used acronym that refers to the countries with burgeoning middle classes that investors like to invest in (Brazil, Russia, India, and China) – does refer to Russia. 

On the negative side, there are many valid concerns such as a lack of publically available information on Lukoil, a lack of consistency in dividend payments, and of course the fact that you are investing with Mother Russia – arguably the world’s most corrupt major economy.  But corruption is a significant risk in almost any high growth country.      

What Is a Fair Valuation?

For a variety of reasons, a company like Lukoil is very difficult to value.  If I were going to purchase an Exxon or Chevron, both of which are American oil companies, I would want to see a P/E or forward P/E – ideally both – of 9 or less and a dividend yield of at least 3%.  For Total, a France –based integrated international oil and gas company with operations in more than 130 countries, I want to see a P/E of around 7 and a dividend yield of around 6%.  For Lukoil, I want to see a P/E close to 4 and evidence that the company will continue to grow earnings at 10-15%.  Considering all of the information currently available on Lukoil in the public domain, an entry point of under $60 seems reasonable.               

3 Reasons to buy Lukoil

  1. Lukoil is both a growth and a value play.  The company has significantly grown both revenues and earnings since it became a publically traded company.  It is partnering with US companies like Conoco Phillips and working to improve the efficiency of its operations, which will certainly improve the bottom line.  That means that its dividend of 3 – 4% could very easily double over the next couple years.  Or they could reinvest earnings into projects to continue to grow.     
  2. Lukoil has a beta of around 1.5 (compared to 0.8 for Chevron and 0.5 for Exxon).  So if you believe that the price of oil may sharply increase in the future, then you'll want to consider purchasing Lukoil.  
  3. Lukoil has gained access to key reserves in countries like Azerbaijan and the "stans" (e.g., Kazakhstan, Uzbekistan, etc.).  Plus Lukoil is well positioned to supply emerging economies like China, India, and Eastern Europe with oil and gas.

My Foolish Take

Investors are starting to take notice of this company.  Although more risky than many of the other oil companies, Lukoil offers more upside at a reasonable, though not compelling valuation.  I would consider waiting for a significant pull back and for the price to drop below $60 a share before purchasing Lukoil – at under $60 a share, however, my risk/reward tolerance is met. 

RyanPeckyno has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron and Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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