Lukoil Profit Unexpectedly Falls on Weak Refining, Trading

Lukoil PJSC unexpectedly reported lower fourth-quarter net income on weak refining and trading operations, but positive free cash flow means investors could be rewarded with the highest dividend yield among major Russian oil companies.

The pandemic continued to put pressure on oil firms’ earnings late last year as soft demand narrowed margins from producing and selling fuels. But Russian companies remained committed to dividend payments in 2020 despite the hit from Covid-19 and output curbs as part of the OPEC+ deal.

In the fourth quarter, Lukoil’s “international trading operations, lower refinery throughput volumes, weaker refining and trading margins” offset higher crude production, growth in oil prices, ruble’s depreciation as well as an increase in international gas output, Russia’s second-biggest oil producer said in an earnings statement.

Net income dropped 42% to 29.4 billion rubes ($399 million) in the final three months of last year compared with the preceding quarter, and also missed analyst estimates. Free cash flow -- the basis for dividend payments -- reached 85.5 billion rubles in the fourth quarter, contributing to 281.1 billion rubles for the whole year.

Lukoil shares fell most in nearly two weeks, dropping as much as 3.53%, and traded at 6,101.5 rubles as of 6:40 p.m. in Moscow.

Dividend Prospects

Lukoil expects to pay a final dividend of 213 rubles per share, which would bring the total payout to shareholders for the last year to 259 rubles, the company’s first vice president Alexander Matytsyn said at the conference call Wednesday. “The board of directors will make its decision on the final dividends as soon as in April,” he said.

If the payout materializes, Lukoil’s full-year dividend yield will reach 4.2%, according to estimates from Gazprombank and Moscow-based Sova Capital. This is above the average yield for Russia’s oil and gas companies, which reached 3% last year, according to Gazprombank.

Lukoil has pledged to pay out the equivalent of at least 100% of its adjusted free cash flow as dividend. It defines adjusted free cash flow as net operating cash flow minus capital expenditure, interest paid, repayment of lease obligations and share repurchase expenses.

The Russian energy producer aims to increase its oil and gas production, excluding the West Qurna 2 project, by 2% this year, keeping in mind crude restrictions imposed as part of Russia’s deal with the Organization of Petroleum Exporting Countries, according to Lukoil’s presentation. The producer’s 2020 daily hydrocarbon output dropped 11.1% on the previous year to nearly 2.1 million barrels of oil equivalent, mainly due to higher gas production.

Lukoil complied with the OPEC+ restrictions in its home market and internationally, with oil production at its key foreign project -- West Qurna 2 in Iraq -- at some 90,000 barrels a day below capacity as of end-2020, according to the report.

Still, at home, the company increased annual crude and condensate output at four West Siberian fields by just over 20% to more than 4.2 million tons, or around 84,000 barrels a day.

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