Stock Analysis & Valuation PJSC Lukoil (LKOH.L)

• Previous Close: £55.71
• Sector Valuation Confidence Level: Low

Valuation method	Value, £	Upside, %
Artificial intelligence (AI)	n/a	n/a
Intrinsic value (DCF)		n/a
Graham-Dodd Method	43.40	-22
Graham Formula	917.40	1547

Strategic Investment Analysis

Company Overview

PJSC LUKOIL is one of Russia's largest vertically integrated oil and gas companies, engaged in exploration, production, refining, and distribution of petroleum products. Founded in 1993 and headquartered in Moscow, LUKOIL operates a vast retail network of over 5,000 filling stations across 19 countries, reinforcing its global footprint. The company's diversified operations span upstream (oil and gas exploration and production) and downstream (refining, petrochemicals, and marketing) segments, ensuring resilience against market volatility. LUKOIL is also a key player in advanced polymer-bitumen binders, catering to infrastructure development. Despite geopolitical risks, the company remains strategically significant in the global energy sector, particularly in Eastern Europe and Central Asia. Its vertically integrated model allows cost efficiencies and stable cash flows, making it a notable entity in the Oil & Gas Integrated industry.

Investment Summary

LUKOIL presents a mixed investment case. On the positive side, its vertically integrated operations provide stability, with strong revenue ($9.22 trillion RUB in FY 2021) and net income ($775.5 billion RUB). The company's beta of 0.56 suggests lower volatility compared to the broader market, appealing to risk-averse investors. Additionally, LUKOIL's substantial dividend payout (RUB 2,479.54 per share) enhances its attractiveness for income-focused portfolios. However, geopolitical risks, particularly due to its Russian base, and exposure to fluctuating oil prices pose significant challenges. The company's debt-to-equity ratio and capital expenditures (-RUB 433.4 billion) warrant scrutiny, as they may impact long-term financial flexibility. Investors must weigh these factors against the backdrop of global energy transition trends.

Competitive Analysis

LUKOIL's competitive advantage lies in its vertical integration, which allows it to control costs and maintain profitability across the oil and gas value chain. Its extensive retail network (5,005 filling stations) provides a steady downstream revenue stream, while its upstream operations ensure a reliable supply of crude oil. The company's focus on advanced polymer-bitumen binders also differentiates it from peers, tapping into niche markets. However, LUKOIL faces stiff competition from global oil majors, particularly in refining and petrochemicals. Its reliance on the Russian market exposes it to regulatory and geopolitical risks, unlike more diversified competitors. Additionally, the company's technological investments lag behind Western peers, potentially limiting efficiency gains. Despite these challenges, LUKOIL's scale and integration provide a buffer against sector downturns, though long-term growth may hinge on diversification and geopolitical stability.

Major Competitors

• Rosneft (ROSN.ME): Rosneft is Russia's largest oil producer, with strong government backing ensuring preferential access to reserves. Its scale dwarfs LUKOIL, but inefficiencies and political influence can hinder operational agility. Rosneft's refining capacity is superior, but LUKOIL's retail network gives it an edge in downstream markets.
• Gazprom (GAZP.ME): Gazprom dominates Russia's natural gas sector, with extensive pipeline infrastructure. While less focused on oil, its integrated energy model competes with LUKOIL in certain markets. Gazprom's geopolitical leverage is a strength, but LUKOIL's downstream operations provide better diversification.
• Tatneft (TATN.ME): Tatneft specializes in heavy oil production and has a strong regional presence in Tatarstan. It is smaller than LUKOIL but more efficient in upstream operations. However, its limited refining and retail footprint reduces competitiveness in downstream segments.
• BP plc (BP.L): BP is a global energy major with diversified operations, including renewables. Its technological edge and Western markets access contrast with LUKOIL's regional focus. BP's downstream and retail operations are more advanced, but LUKOIL's cost advantages in Russia provide localized competitiveness.
• ExxonMobil (XOM): ExxonMobil's global scale and technological prowess make it a formidable competitor. Its refining and petrochemical capabilities exceed LUKOIL's, but higher operational costs in non-Russian markets level the playing field. Exxon's diversification into low-carbon energy could future-proof it against LUKOIL.