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Why Oil Is Still Underpriced

Oil prices are pulled in…

Zainab Calcuttawala

Zainab Calcuttawala

Zainab Calcuttawala is an American journalist based in Morocco. She completed her undergraduate coursework at the University of Texas at Austin (Hook’em) and reports on…

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Russian Lukoil Loses 50% of Profits in Oil Price Crunch

Lukoil, Russia’s largest private oil firm, announced on Monday a deep drop in profits in the first quarter of 2016 due to the new round of oil price slides that occurred in January.

Bottom-line profit figures were down by more than 59 percent in the first three months of this year, compared to the same period in 2015. Net profits equaled $654 million - a performance significantly worse than analysts’ anticipations.

The company said a measure of underlying profitability, known as EBITDA (earnings before interest, taxes, depreciation and amortization), fell by 32 percent as well.

Despite the lackluster financial reports, the company’s stocks increased by 0.8 percent in value. Overall, its shares have increased 23 percent since the year began. Related: Permian Springs To Life With $50 Oil

The Russian ruble’s declining value (see chart below) also challenged the company, as it struggled to meet its financial obligations due in foreign currencies that progressively became more expensive. If exchange rate factors had been limited, Lukoil said the profit fall could have been 20 percent.

(Click to enlarge) 

Figure 1: U.S. Dollar versus Ruble, source: Bloomberg

Raw revenues fell 18 percent due to chronically low oil prices, but the company claims the sizable investments it had made in reversing the effects of the trend had begun to offset the financial losses. Related: Oil Prices Stimulated By Fed’s Inaction

The firm, the second-largest of its kind in Russia, also plans to develop Siberian oilfields and has announced new investments in Iranian oil projects back in January in order to fight plateauing production rates.

LukOil’s cuts in capital expenditure might be significantly more than that of its Russian peers – Rosneft actually increased its 2015-2016 capex budget - but are relatively low compared to other big international oil companies.

 

(Click to enlarge)

Figure 2: LukOil capex and opex, Source: LukOil Q1 shareholder presentation

“As we mentioned on several occasions last year and at the start of this year, we made a decision to reallocate [capital expenditure] towards new growth projects from the brownfields,” Pavel Zhdanov, the company’s head of capital markets, said. “Now the situation has stabilized somewhat we are working hard on adding efficient drilling in west Siberia to reduce the decline in production.”

Overall, Lukoil’s oil production increased slightly by 0.5 percent or 214 million barrels in the first quarter, according to the spokesman.

By Zainab Calcuttawala for Oilprice.com

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