Lukoil (MCX: LKOH) — the second company in terms of oil production in Russia. One of the world's largest oil and gas companies with a full production cycle in terms of proved reserves and hydrocarbon production.
24 November financial statements of Lukoil were released for 9 months of 2021. Against the background of rising prices for hydrocarbons, revenue increased by 62%, Furthermore, the company demonstrated a record profit of 539.65 billion rubles, although exactly a year ago reflected a loss of 14.26 billion.
I propose to evaluate, how favorable market conditions affected the operational and financial results of the business and whether it is worth waiting for a new growth in the main indicators.
Disclaimer: if we write, that something has risen or fallen by X% or X times, then by default we mean a comparison with the report data for the same period last year, unless otherwise stated.
Position in the industry
The oil and gas industry quickly recovered from the consequences of the 2020 crisis. Already from the second half of the year, hydrocarbon prices began to grow against the background of restrictions between OPEC+ countries., and through the gradual lifting of restrictions, related to the coronavirus pandemic.
In 2021, the growth of prices and demand in the hydrocarbon market continued against the background of restrictions, cold winter, a hot summer and a global economic recovery from the effects of the pandemic. So, from January to September 2021, the price of Brent crude oil increased from 50 to 79 $ per barrel. As a result, the average price of a barrel at the end of the year 9 months increased by more than 65%.
Thanks to positive changes in the market, Lukoil was able to increase production by November 2021 by 270 thousand barrels per day from a minimum in May 2020 of 1.3 million barrels per day..
That being said, it is important to note, that the company has almost reached the limits of oil production. As of November of this year, there are about 30 thousand barrels per day of free capacity, which naturally limits the growth of operating indicators in the near future, even if OPEC + restrictions are completely lifted.
Operating indicators
Oil & Hydrocarbons. The main production region of Lukoil remains Western Siberia — 43% total oil production. The company increased the average daily production of hydrocarbons for the first 9 months only on 1% — up to 2.15 million barrels of oil equivalent. Production from oil and gas fields has not yet returned to pre-crisis levels.
Furthermore, oil and liquid hydrocarbon production volumes fell to a minimum of recent years - 1.643 million barrels of oil equivalent per day. IN 4 Quarter the company continued to increase oil production, therefore, the final results for 2021, probably, will be at the level of the crisis year 2020.
Lukoil has practically exhausted free oil production capacities, which makes it impossible to further increase its production at least to the volumes of 2017-2019.
Gas. Gas production volumes increased by 13% – up to 23.5 billion cubic meters, despite the natural decline in production at Russian fields. Growth driver was an increase in gas production in Uzbekistan due to strong demand from China, among other things, against the backdrop of economic recovery from the effects of the pandemic.
Production of petroleum products and oil refining. The volume of oil refining at its own refineries increased by more than 4% — up to 45.5 million tonnes, of which 30.4 million tons accounted for capacities in Russia, and a little more than 15 million tons for foreign assets. The growth of processing is associated with the improvement of the market situation and the completion of repair work at a number of production enterprises. The total volume of production of petroleum products at the company's refining facilities increased by 6% — up to 42.6 million tonnes, and petrochemical production remained roughly at last year's levels of 0.9 million tonnes..
Lukoil's operating performance for 9 Months, thousands of BOE per day
| Extraction of hydrocarbons | Production of oil and liquid hydrocarbons | Gas production | Refinery refining volume | |
|---|---|---|---|---|
| 2017 | 2254 | 1808 | 446 | 1341 |
| 2018 | 2332 | 1801 | 531 | 1351 |
| 2019 | 2367 | 1815 | 552 | 1389 |
| 2020 | 2124 | 1678 | 446 | 1216 |
| 2021 | 2150 | 1643 | 507 | 1275 |
Financial indicators
Despite the fact that Lukoil's operating indicators have not returned to pre-crisis levels, high hydrocarbon prices helped to update the company's historical highs on key financial indicators.
Sales revenue increased by 62% — to a record 6667.11 billion rubles. At the same time, growth occurred in all major business segments., including sales:
- oil (+73%);
- oil products (+57%);
- petrochemistry (+86%);
- gas (+91%).
The main share of sales in monetary terms fell on oil and petroleum products, which together brought Lukoil 94.3% of revenue. About 97,5% oil sales and 80,2% petroleum products in monetary terms accounted for export supplies.
Structure of sales revenue by type of product for 9 months of 2021
| Petroleum products | 56,4% |
| Oil | 37,9% |
| Petrochemical products | 1,9% |
| Gas | 1,8% |
| Realization of energy and related services | 0,7% |
| Other sales | 1,3% |
56,4%
Oil purchase costs, gas and refined products of subsidiaries and joint ventures increased by 77% — to 3817.68 billion rubles — due to rising prices for hydrocarbons. Operating expenses increased by 13% — to 369.28 billion rubles — against the background of increased transportation costs and processing costs. At the same time, commercial, general and administrative expenses increased by 9% — up to 155.87 billion rubles, which was mainly affected by the increase in employee salaries.
I would also like to note a more than twofold increase in the mineral extraction tax in Russia to 757.172 billion rubles.. Account rose against the background of an increase in the rate on 120% due to rising oil prices, tax maneuver and the abolition of tax incentives for the production of high-visicate oil.
As a result, Lukoil's operating profit grew almost by 4 times from the low base of the previous period and reached a record 681.77 billion rubles.
Last year, against the background of the weakening of the ruble, the company recorded a loss from the revaluation of exchange rates in the amount of 38.6 billion rubles. This year, the exchange rate was more stable and the loss from exchange rate differences decreased to 3.1 billion rubles. At the same time, the share of profits in associates and joint ventures increased more than in 2 times — up to 19.83 billion rubles. Other expenditures decreased almost in 10 once: from 92.4 to 9 billion rubles.
Thanks to the improvement of the situation in the oil and gas market, the company formed a net profit of 539.65 billion rubles against a net loss of 14.26 billion rubles.
Lukoil's financial performance for 9 Months, billion rubles
| Revenue | Operating profit | Net profit | |
|---|---|---|---|
| 2017 | 4274,25 | 358,98 | 298,3 |
| 2018 | 5992,67 | 545,3 | 460,15 |
| 2019 | 5928,81 | 643,97 | 520,87 |
| 2020 | 4109,06 | 182,6 | −14,26 |
| 2021 | 6667,11 | 681,77 | 539,65 |
Investments and debts
Despite the improvement in the market situation, the level of investments of "Lukoil" was lower than the indicators of previous years. The size of capital investments amounted to 305.76 billion rubles - against 360.28 billion rubles for the same period last year. The fall in capital expenditures was due to a reduction in the cost of exploration and production for 23%, while investments in the processing segment, trade and sales increased by 22% against the background of sales growth.
For 9 For months, Lukoil reduced the amount of net debt almost by 43 times — from 315.88 to 7.43 billion rubles for 30 September 2021 – due to the growth of the volume of money and their equivalents in accounts on 82% — to 627.12 billion rubles.
At the same time, EBITDA increased more than in 2 Times, and the company reflected a record low debt load on the "net debt" ratio / EBITDA», which was less than 0.01 at the end of September×, — which indicates a high level of financial stability.
Dynamics of Lukoil's capital investments for 9 Months, billion rubles
| 2017 | 373,77 |
| 2018 | 338,26 |
| 2019 | 314,04 |
| 2020 | 360,28 |
| 2021 | 305,76 |
373,77
Dynamics of the debt burden at the end of the period, billion rubles
| net debt | net debt / 12mEBITDA | |
|---|---|---|
| 2017 | 286 | 0,34× |
| 2018 | 42,4 | 0,04× |
| 2019 | 37,2 | 0,03× |
| 2020 | 315,88 | 0,46× |
| 9м2021 | 7,43 | < 0,01× |
Dividends
The company's dividend policy assumes to direct at least dividends 100% from free cash flow for the reporting period. At the same time, dividends are paid twice a year..
Adjusted free cash flow is calculated based on IFRS data and is defined as net money, received from operational activities, less capital expenditures, interest paid, repayment of lease liabilities, as well as expenses for the acquisition of shares of the company.
2 December at the extraordinary general meeting of shareholders approved dividends following the results of the first 9 months of 2021 in the amount of 340 P per share.
Dividend per share
| 2016 | 120 R |
| 2017 | 215 R |
| 2018 | 250 R |
| 2019 | 542 R |
| 2020 | 259 R |
| 9м2021 | 340 R |
120 R
What's the bottom line?
The rise in hydrocarbon prices allowed Lukoil to reflect record financial performance following the results 9 months of 2021. But the operating indicators have not returned to the pre-crisis levels of 2018-2019.. Furthermore, the company reports, that its free production capacity is almost exhausted and is about 30 thousand barrels per day. Therefore, the potential for further growth in oil production in the near future will be limited., even if countries, members of OPEC+, continue to ease restrictions.
At the same time, due to the lack of investment in new projects, the oil and gas industry may face a shortage of supply in the near future. 5 years, which will create risks of further growth in hydrocarbon prices. This situation may allow Lukoil to increase revenues even without a significant increase in production volumes..
Taking into account world prices, it is already possible to predict record financial results for the whole of 2021.. At the same time, the holding almost zeroed out net debt and approved record interim dividends..
