IV- Lukoil: Double Whammy

By Conrad de Aenlle International Herald Tribune

- AO Lukoil Holding, the huge Russian energy company,

has been a lightning rod for the fear that has gripped

emerging markets over the last year and a half.

As a bellwether and one of the largest companies in Russia,

it has one of its more liquid stocks, the ones that investors

look to dispose of when they want to exit a market in a

hurry - and there were no markets that investors were more

in a hurry to leave than Russia.

The fact that the commodity that Lukoil sells, crude oil, has

experienced its own dramatic price decline has not helped.

The stock, which is listed in Moscow and on the Nasdaq

market in the United States, fell about 90 percent from its

1997 peak; it has recovered since, but at its current price of

$4.19 it is still 82 percent off its 52-week high of $23.85

Depending on the criterion used, the stock now appears

either cheap or expensive.

''Lukoil's current low profitability puts it at higher valuation

multiples than its Western peers, although the gap should

narrow in the medium term,'' said Andrei Gaidamaka, who

follows the company for Morgan Stanley Dean Witter Inc.

But a rough assessment of its worth, made by calculating

the price that all of the oil in its reserves would fetch on the

market, suggests that the stock is trading much more

cheaply than others in the industry.

''Lukoil's large proven reserve base makes it the largest

publicly traded oil company in the world,'' he said. ''The

stock would have to appreciate by five to 10 times before it

would reach the per-barrel-of-reserves valuations of even

emerging-markets oil companies.''

Do not count on that happening soon. Mr. Gaidamaka noted

that 80 percent of those reserves are in western Siberia and

have ''marginal field economics,'' meaning they cost at least

as much to extract as they can be sold for. This was true, he

said, even before the price of crude spiraled downward.

On the plus side of the ledger, he cited a number of joint

ventures that Lukoil has with Western oil companies, which

gives it access to capital and technology, and its ''aggressive

management able to seize development opportunities.''

''We expect this to translate into high growth in the bottom

line in three to five years' time,'' Mr. Gaidamaka said.

Roger Monson, head of equity strategy at Rabobank

International, said he saw reason to hope that the worst may

be behind Lukoil and that the stock could benefit from a

change in any of the circumstances that drove it lower.

''On any sign of light at the end of the Russian tunnel, or in

crude prices, this will be one of the first stocks bought by

foreigners, as well as by surviving domestics,'' he said.

A planned alliance with RAO Gazprom, Russia's largest

company, also could spur investor interest, Mr. Monson

said. ''Its deal to combine with Gazprom will make it part of

a global energy powerhouse, once finances are sorted out,''

he said. ''The deal so far is for production and exploration

cooperation, but there is now also a plan to do joint

distribution and marketing, not only in the CIS zone but

globally.'' The Commonwealth of Independent States is how

the countries that the Soviet Union comprised are now

known.

IHT 5 DEC 1998 P 17