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Fitch Changes LUKOIL’s Outlook to Positive; Affirms IDR at 'BBB-'

January 25, 2008 | Cbonds

Fitch Ratings-London-24 January 2008: Fitch Ratings has today changed OAO LUKOIL’s (“LUKOIL”) Outlook to Positive from Stable. At the same time, Fitch has affirmed LUKOIL’s ratings at Long-term foreign and local currency Issuer Default (IDR) ‘BBB-’ (BBB minus) and Short-term foreign currency ‘F3’.

The Positive outlook reflects LUKOIL’s strong 9M07 and FY2006 operational and financial profiles, and a multi-year track record of healthy leverage and coverage ratios. It also incorporates Fitch’s expectation that LUKOIL will be able to successfully implement its growth strategy while maintaining its sound financial profile and credit metrics.

Fitch notes that, notwithstanding LUKOIL’s aggressive growth strategy, it has a relatively conservative financial policy. Its debt is stable and relatively moderate, which LUKOIL plans to maintain over 2007-2011 (unless any significant acquisition arises that the company intends to fund with debt). Its main credit metrics have been strong as expressed by a net debt/EBITDA of below 1x over the last six years. At end-September 2007 net debt/EBITDAR and EBITDAR/net interest remained strong at 0.8x (FYE2006: 0.7x) and 66.5x (FYE2006: 36x), respectively. Profitability, as measured by EBITDAR/net revenue, was stable at 26.2% (FY2006: 26.8%; FY2005: 26.6%).

The company benefits from the scale of its operations, being Russia’s second-largest oil and gas producer. In addition, LUKOIL has extensive and relatively well-developed and efficient refining capacities, allowing the company to capitalise on opportunities provided by more profitable refined product sales compared to crude oil sales. LUKOIL remains the only Russian company with a significant international presence that includes upstream, refining and retail sales of petroleum products. While most of LUKOIL’s reserves and production remain in Russia, international operations are growing slowly in the upstream segment, both relative to previous years’ volumes and as a share of LUKOIL’s total reserve and production base. Additionally, the company has been successful in diversifying into the gas segment which, in the medium- to long-term, can potentially enhance profitability and reduce dependence on volatile crude oil prices.

Although LUKOIL’s production indicators in 2007 were worse-than-expected, Fitch understands that these are likely to be transitory as they relate mainly to timing differences in bringing forecast production on stream.

Upside rating potential may result from improved EBITDAR margin, sustained positive free cash flow generation, successful implementation of LUKOIL’s overall growth strategy and a successful development of a profitable gas segment. Downside rating potential could be caused by debt-funded acquisitions (which could result in significant net debt/EBITDAR ratio deterioration) or a significant and sustainable crude oil price decrease, without a commensurate decrease in production costs.

Company: Lukoil

Full company nameLukoil PJSC
Country of riskRussia
Country of registrationRussia
IndustryOil and gas

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