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On August 29th LUKOIL published its 2Q 2008 report under US GAAP. During 2Q 2008 net income of the company rose +64.1% versus similar value of 2007, form 2,517 bn USD to 4,130 bn USD. Versus 1Q 2008 (3.163 bn USD), net income had also demonstrated growth of +30.5%. The quarter value of net income had also appeared below market expectations at average of 10.3%, but met out forecast, based on value of 4.128 bn USD.

Throughout 2Q 2008 LUKOIL’s sales expanded +58.7% above prior year’s 2Q, forming 31.935 bn USD, note though, we have expected the value to form 35.507 bn USD, EBITDA added +59.8% to 6.403 bn USD, whereas we have expected about 6.388 bn USD.

EBITDA margin of LUKOIL has formed 20%, appearing +0.2 p.p. above past year, and +1 p.p. over annual value, net income margin added +0.4 p.p. to 12.9%. Invested capital yield of LUKOIL is still at a high level and within annual timeline; taking into account the results of 2Q 2008 has formed 32.64%.

Net income growth was supported by several factors, among which – first of all: growth of quarter average price of oil and oil products sold by the group, which expanded at average of about 81.5% in between 2Q 2007 and 2Q 2008. Secondly – improvement of oil products sales in 2Q 2008 +6.3%. The growth of net income was withheld by fall of extraction throughout 1H down -3.1%.

Now we correct our model of LUKOIL, adding several changes into it. For example, we have reviewed our forecast of oil and oil products sales price upwards at average of +10%, using current trends of global energy-carriers market and our forecast of world’s economic and political environment development.
S In LUKOIL’s model we have attempted to reflect the influence of political, geo-political and macro-economical risks in the rate of weighted average cost of capital.

In addition to this we have also reviewed capital investments volume, expanding it at +3.3% (average) throughout forecasted term, using results of 1H 2008.

The resulting corrections brought a new fair price for LUKOIL’s stock, which now forms 129. 63 USD apiece versus previously forecasted 138.44 USD (-6.4%). And therefore, due to a significant growth potential (+74.71%) we confirm “BUY” recommendation on company’s stocks.

LUKOIL: Decent report of 2Q 2008 - September 15, 2008 (PDF Lukoil Shares Report 2008)

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