Daily analyst comments

Lukoil has signed a contract with the US ConocoPhillips for the buyout of 7.6% of its shares at a price of USD 53.25 per share, the oil major said in a statement on July 28. Lukoil has also secured an option to buy out the remaining 11.6% from ConocoPhillips before September 26, 2010. However, we do not exclude that Lukoil may run into financial difficulties in the event the option is exercised.

In 2009, ConocoPhillips announced a plan to sell its 20% block of Lukoil shares on the market within three years. Simultaneously, Lukoil expressed an intention to buy the shares to prevent pressure on its stocks from the massive sell-off on the free market. The talks had been in progress for more than half a year, and have finally led to the partial buyout of the shares by Lukoil.

According to our estimates, the buyout should have a positive effect on Lukoil’s stock valuations, as the buyout was carried out a below-market price at the time of its announcement. If Lukoil opts to buy out the remaining shares from the 20% share package, the effect on its stock valuations should also be positive, but could hurt its financial stability in the future.

Apart from the immediate effect on Lukoil stock valuations, the buyout will permit management to tighten control over the company, which we regard as a positive move at a time when the free float remains high. Our rating for Lukoil shares is BUY, with a target price of USD 89.5 per share.