Stock Analysis & Valuation PJSC Lukoil (LKOD.L)

• Previous Close: £0.72
• Sector Valuation Confidence Level: Low

Valuation method	Value, £	Upside, %
Artificial intelligence (AI)	1.50	108
Intrinsic value (DCF)	129.00	17817
Graham-Dodd Method		n/a
Graham Formula		n/a

Strategic Investment Analysis

Company Overview

PJSC LUKOIL (LKOD.L) is one of Russia's largest vertically integrated oil and gas companies, listed on the London Stock Exchange. The company operates across the entire energy value chain, including exploration, production, refining, and distribution of petroleum products. LUKOIL has a strong presence in Russia and international markets, with significant upstream assets in regions like Western Siberia and the Caspian Sea, as well as downstream operations in Europe and the U.S. The company is known for its extensive retail network, supplying fuel to consumers through thousands of gas stations. Despite geopolitical challenges, LUKOIL remains a key player in the global energy sector, leveraging its vast reserves and refining capabilities. The company's financial performance is closely tied to oil prices, making it sensitive to commodity market fluctuations. Investors should consider its exposure to regulatory risks in Russia and international sanctions when evaluating its long-term prospects.

Investment Summary

LUKOIL presents a high-risk, high-reward investment opportunity due to its strong operational scale and exposure to volatile oil markets. In FY 2022, the company reported robust revenue of RUB 2.87 trillion and net income of RUB 790 billion, reflecting strong profitability. However, its beta of -2.74 indicates extreme volatility and inverse correlation with broader markets, likely due to geopolitical risks. The company's operating cash flow of RUB 2.8 trillion suggests healthy liquidity, but its total debt of RUB 649.6 billion and uncertain dividend policy (no reported dividend per share) may concern income-focused investors. Given its Russian ties, LUKOIL faces significant regulatory and sanction-related risks, which could impact its international operations and stock liquidity. Investors must weigh its strong fundamentals against geopolitical uncertainties.

Competitive Analysis

LUKOIL's competitive advantage lies in its vertical integration, allowing it to control costs and optimize margins across the oil and gas value chain. Its extensive reserves and refining capacity provide stability in production, while its retail network ensures downstream revenue. However, the company faces stiff competition from global energy giants and regional players. Unlike Western majors such as ExxonMobil and Shell, LUKOIL's operations are heavily concentrated in Russia, making it vulnerable to domestic policy shifts. Its refining capabilities are a strength, but sanctions limit access to advanced technology, potentially hindering efficiency gains. The company's reliance on European markets for downstream sales has been disrupted by geopolitical tensions, forcing it to pivot toward Asian markets. While LUKOIL's low-cost production is a competitive edge, its inability to freely access global capital markets due to sanctions restricts growth opportunities compared to peers. Long-term competitiveness will depend on its ability to navigate geopolitical challenges and diversify its market exposure.

Major Competitors

• Rosneft (ROSN.ME): Rosneft is Russia's largest oil producer, with state backing providing strategic advantages in resource access. It has a stronger political alignment with the Russian government compared to LUKOIL, which may offer stability but also increases sanction risks. Rosneft's vast reserves and partnerships with international firms (prior to sanctions) gave it a technological edge. However, its heavy reliance on state support limits operational flexibility, unlike LUKOIL's more independent structure.
• Gazprom (GAZP.ME): Gazprom dominates Russia's natural gas sector, giving it a different commodity focus compared to LUKOIL's oil-heavy portfolio. Its monopoly over pipeline gas exports to Europe was a key strength, but geopolitical tensions have undermined this position. Gazprom's integrated model is similar to LUKOIL's, but its gas focus provides less diversification. Both companies face similar sanction risks, though Gazprom's larger scale offers more resilience.
• Tatneft (TATN.ME): Tatneft is a smaller Russian oil producer with a strong regional presence in Tatarstan. It has a reputation for efficient operations and lower debt levels compared to LUKOIL. However, its lack of international refining and retail assets limits its downstream profitability. Tatneft's niche focus on heavy oil and tires (a side business) differentiates it but also restricts growth potential relative to LUKOIL's broader operations.
• ExxonMobil (XOM): ExxonMobil is a global energy leader with diversified operations and advanced technology. Unlike LUKOIL, it benefits from access to Western capital markets and fewer geopolitical constraints. Its downstream and chemical segments provide stability, but higher production costs in some regions reduce margin competitiveness compared to Russian firms. Exxon's scale and R&D capabilities are strengths, though it lacks LUKOIL's low-cost Russian reserves.
• Shell (SHEL): Shell's global integrated model and strong LNG portfolio make it a key competitor. Its renewable energy investments provide long-term diversification, unlike LUKOIL's oil-centric approach. Shell's financial flexibility and brand strength are advantages, but its higher cost structure and exposure to European energy policies pose challenges. Unlike LUKOIL, Shell is less reliant on a single geopolitical region, reducing risk concentration.