Research Notes

The main reason behind our upward revision of Lukoil’s stock price is a favorable price trend on the crude market. In 2005, Brent crude prices hit an all-time high of $55, up 45% y-o-y. Our forecast of crude price trends is rather conservative. We have factored into our model $50 a barrel as the price of Brent crude with a subsequent decline to $40 a barrel by 2012

Against the backdrop of falling average industry growth rates of crude output in Russia, Lukoil continues to ratchet up output by 5-6% per year due to development of promising fields in Russia (the Timan-Pechora oil and gas province) and its international projects.

Lukoil remains committed to boosting its raw material base, acquiring reserves in EM countries and expanding retail sales in Europe and the US.

We also believe Lukoil’s stock valuations could be positively impacted by an increase of the stake of US-based ConocoPhillips in Lukoil’s charter capital. Lukoil stands to gain the most from an additional influx of foreign capital to the Russian stock market, as this oil major has the largest weightings in the RTSI (15.5%) and MSCI Russia (34%) indexes.

We assign a Buy recommendation to Lukoil common shares with a target price of $70.69.

Timur Hayrullin

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