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Company Analysis Lukoil

Written by Philip Schubin

Grade 1.3

Paper category

Term Paper


Business Administration>Finance




Term Paper: Comparison of oil production costs This part of this article will examine the break-even costs of Russian oil production and the main drivers of these costs. Later, we will compare capital structures and cover issues related to the corona crisis. The number and location information related to this topic mainly comes from RBC (Russian online business resources that provide reliable business data). Oil production costs are combined through the following factors: lifting costs, exploration costs, and non-revenue-related taxes. The figure below shows the BEP for oil production in different countries. Rosneft’s exploration costs require a large amount of investment, because the main oil and gas fields involve complex drilling procedures, and Saudi oil is mostly located in inaccessible areas. Therefore, compared with competitors, the cost of producing this product is lower, an average of 9 US dollars per barrel. (Oil production cost. BCS-express article.) The main feature of the Russian oil cost structure is that taxation significantly affects this product. price. In 2018, the tax burden accounted for 65% of total revenue, while the tax burden of other oil and gas companies operating in other states was about 18-35%. The main reason is that the Russian government encourages companies to explore difficult-to-access oilfield areas by lowering tax rates and providing them with tax incentives. (Oil production cost RBC article) Another interesting fact is that Russian oil and gas companies conduct business in local currency (rubles) and earn income in foreign currencies. Therefore, the company can obtain additional profits from exchange rate fluctuations. However, investors should also be aware that most of the investment in oil production in Russia comes from foreign countries (for example, technology). This is why currency depreciation pushes up production costs and leads to a decrease in net income. Lukoil’s detailed capital structure takes into account the company’s capital structure and needs to review the equity-to-asset ratio. Lukoil has a relatively high equity-to-asset ratio, which was 0.67 in December 2019. This means that the company relies more on equity rather than debt to fund its operations, which makes it easier for the company to adapt to current fluctuations in oil prices because debt holders are minimized in the event of negative income. This is a normal situation in which Russian companies have small debts in their capital structure (for example, direct competitor "Surgutneftegas" had a negative net debt in the last quarter of 2019. The only company with large debts is Rosneft, where debt/EBITDA The ratio is 1.71 in 2019. 4Investment and capital expenditure At the end of 2017, Lukoil approved the company's 2018-2020 mid-term development plan and 2018-2027 long-term strategy, pointing out that dividends have grown steadily. As Alekperov previously reported, within the framework of the 10-year plan, the company plans to invest US$8-85 billion to maintain oil production at 100 million tons per year and increase natural gas production by 3.5-40 billion. cubic meter. (According to Wajit Alekperov’s 10-year investment plan in an interview) Alekperov added that Lukoil continues to develop its economy in the Caspian Sea and the Baltic Sea. In addition, Lukoil actively participates in West Africa projects. "We have entered three countries, and now four more countries provide us with joint work. This has never happened before. This summit (held in Sochi with African countries) provides opportunities for Russian companies today , Such as working in one of the most promising markets: West Africa." The Republic of Congo, Ghana and Cameroon are extracting oil. During the meeting, Alekperov and the President of the Russian Federation introduced Lukoil’s social and several educational projects, that is, the company renovated the oil pavilion of the main economic achievement exhibition center. The children’s town there appeared in the form of drilling and oil refineries, as well as several educational projects. “We also started the theater due to the president’s instructions,” Alekperov added. "Due to PIT and international projects, investment should increase relative to this year. We will continue to formulate our $8 billion plan based on our long-term strategy. Currently, capital expenditures are expected to be 550 billion Russian rubles, excluding WesternQurna-2,"- (A recent project in Basra, southern Iraq-they cooperated with the Norwegian oil refining company Statoil) The company headquarters mentioned earlier. According to a senior manager, many decisions will depend on OPEC+'s statement. “We did not plan any changes in the first half of the year. We have planned investments in the second half of the year. We can implement OPEC+ according to the decision,” the company explained. At the same time, Lukoil's capital expenditures in 2019 may be lower than the previously planned 470 billion rubles. Soon after these words, Lukoil's capital expenditure for January-September 2019 decreased by 7.2% year-on-year to 314 billion Russian rubles. According to the company, the main reason for the decrease is the reduction of investment in natural gas projects in the Uz region in Bekistan and the completion of major construction projects in oil fields and the Caspian Sea. Read Less