Research Notes

We upgraded our target price for Lukoil stocks to $87.40 due to rising petroleum prices, strong corporate financial results in 9M05, the acquisition of PrimorieNG and the discovery of a major oilfield in the Caspian Sea.

A month has passed since our latest upgrade of the oil producer's target price, but during this time Lukoil shares surged 27%, exceeding our target price. January 2006 was rich in positive events for both the oil market in general and Lukoil in particular.

Brent contract gained more than 15% during a month, breaking through the $65/bbl mark. Events surrounding Iran's nuclear program, instability in Nigeria and the Middle East lay the groundwork for a rally in petroleum prices further down the road.

Apart from this, Lukoil summed up its FY05 operating performance, released 9M05 US GAAP financials which once again confirmed the accuracy of the oil major's strategy aimed at rapidly expanding its refining business, retail network and forming its own oil export infrastructure.

The discovery of the Filanovskoye field will boost Lukoil's hydrocarbon reserves by 5%. The acquisition of PrimorieNG with reserves equaling 1.38 bln boe for $0.19 per barrel will also be a value-accretive event.

Based on these factors we revised our DCF model for Lukoil, according to which its shares still hold 14% upside potential.

Timur Hayrullin

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