Azernews.Az

By Bloomberg

OAO Lukoil rose to a two-week high in New York as BCS Financial Corp. advised clients to buy the Russian oil producer’s stock, saying the “huge discount” to its biggest competitors isn’t justified.

The American depositary receipts jumped 2.7 percent to $47.98 yesterday. The Moscow-listed shares, which gained 2.3 percent, sell for 3.9 times projected 12-month earnings. That compares with an average multiple of 10.5 among 15 global peers, data compiled by Bloomberg show.

Lukoil’s stock price doesn’t reflect the tax benefits it will get from developing new Caspian Sea fields as well as production in areas where crude is more difficult to extract, BCS wrote in an e-mailed research report yesterday. BCS, the biggest equity trader in Moscow by volume, started coverage of Lukoil with a buy recommendation. The stock has 17 buys and two holds, making it the highest-rated oil company among 15 global peers, according to data compiled by Bloomberg.

“Lukoil is one of the most undervalued names in the industry and is one of our top picks,” Kirill Tachennikov, an analyst at BCS in Moscow, said by phone. “Investors tend to overlook the opportunities offered by Lukoil and focus on all sorts of risks instead. There is every reason Lukoil should be decreasing its discount to the sector.”

Lukoil, which said in a statement yesterday that overseas output jumped 44 percent from January through September, has been focusing on diversifying production away from depleting wells in Russia to countries including Iraq and Uzbekistan. The company loaded its first tanker of oil at the southern Iraqi port of Basra in July after starting output in March at the West Qurna-2 deposit, its largest. It’s also working to start fields in the Caspian Sea and Siberia to increase production.

International Sanctions

The ADRs are down 24 percent in 2014. Investors have sold Russian assets as international sanctions linked to the Ukraine conflict curb growth in the $2 trillion economy. The U.S. and the European Union have imposed export bans, financing restrictions and other measures to punish Russia for supporting a rebellion. President Vladimir Putin, who denies involvement, has responded by barring some food imports.

The sanctions have pushed Russia to the brink of a recession. Gross domestic product will expand 0.3 percent this year, the weakest since 2009, according to the average estimate of economists surveyed by Bloomberg. Banks including JPMorgan Chase & Co., Morgan Stanley and Barclays Plc forecast a contraction in GDP in 2015.

Ruble Plunge

The Bloomberg-Russia-US Equity Index gained 0.9 percent to 70.97 yesterday. The Market Vectors Russia ETF, the biggest U.S. exchange-traded fund that holds Russian shares, added 1.1 percent to $21.03.

The ruble has plunged 28 percent this year as oil, the country’s top export, fell below $80 a barrel for the first time in four years. Lukoil has benefited from the weakening currency as it makes more than 90 percent of its sales overseas while 80 percent of its costs are in Russia.

Crude ended a three-day decline yesterday. Leading OPEC members are resisting calls to reduce output while others seek action to support prices at a Nov. 27 meeting.

Lukoil added 0.1 percent to 2,233.1 rubles by 10:47 a.m. today. The RTS Volatility Index, which measures anticipated swings in futures, tumbled 4.6 percent to 33.56.

‘Russian Roulette’

“If you invest in Russia, you play Russian roulette and valuations don’t really matter,” Rudolph-Riad Younes, co- founder and portfolio manager at R Squared Capital Management LP in New York, said by phone yesterday. “Sanctions are here to stay for a long time as Putin has no intention to de-escalate the Ukraine crisis.”

Lukoil’s net income is projected to jump 26 percent to $9.8 billion, according to the mean estimate of eight analysts surveyed by Bloomberg.

“I am keeping a close eye on Lukoil,” Anvar Gilyazitdinov, who manages $10 million at Rye, Man & Gor in Moscow, said by phone yesterday. “The market is ignoring fundamental indicators of the company as it remains focused on macro factors, such as the Ukraine crisis and slowing economy. The Russian market is one of the most hated globally and that is why it’s a good time to buy.”