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Uralsib - Russia Daily Equity Update, OIL & GAS - Oct 25 , 2011.



CEO speaks of change in dividend policy

Dividend payout to improve despite higher capex. LUKOIL (LKOH RX - Buy) CEO Vagit Alekperov said that the company will improve its dividend policy to increase shareholder value. He confirmed that the dividend policy is to be discussed at the board of directors meeting on Thursday. Vladimir Nekrasov, LUKOIL's vice president for refining, announced that downstream capex will increase 40% YoY to $3 bln per annum in 2011and remain at that level in 2012-14.

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CEO emphasizes strategy, openness, dividend policy. Alekperov named three priorities in raising shareholder value: a new long-term strategy, greater openness to investors, and a revised dividend policy. In light of this, the 40% increase in refining capex does not seem logical, as LUKOIL's production decline seems to prioritize upstream rather than downstream capex. Earlier, Alekperov announced capex plans going forward of $10 bln per annum with a focus on international upstream projects to combat production decline. We expect 20-25% of this to go on downstream projects, while Nekrasov's numbers imply that downstream capex is to account for up to 30%. However, we believe that Nekrasov's numbers are preliminary and could be interpreted as a signal to the Russian government that the company will increase gasoline production and help avoid future gasoline shortages.

Payout could be raised to 30% for 2011 for a 7% yield. We believe that with capex ranging between $9.5-$10.9 bln in

2011-14, LUKOIL should be able to increase its US GAAP dividend payout ratio to 30% in those years, up from about 20% in 2009-10. At the current share price, this would imply a 7% dividend yield for 2011. We reiterate our Buy recommendation on LUKOIL and target price of $82/share.


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Publication:Russian Banks and Brokers Reports
Date:Oct 28, 2011
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