Lukoil plans to cancel treasury shares and to launch a buyback

Altynay IbraimovaJanuary 15, 2018

On Friday, the meeting of the Board of Directors of Lukoil was held, at which preliminary results of 2017 were summed up and tasks for the current year were set.

The main news at the meeting was a decision on the cancellation of treasury shares, which Lukoil kept as an untapped stock for the acquisition of assets. Following the meeting, the Board of Directors of Lukoil supported the management initiative to repay the bulk of treasury shares and to create a share repurchase program as a step-by-step mechanism for allocating capital to shareholders.

The history of the treasury shares in question starts in 2004, when the American ConocoPhillips, in agreement with the Russian government, acquired a 7.6% stake in Lukoil, later bringing the share to 20%. However, ConocoPhillips did not note the great benefits of partnership with Lukoil, as a result of which in 2010 the Company bought back 7.59% and 5% of shares. In February 2011 ConocoPhillips completely withdrew from the share capital of Lukoil, selling the remaining shares of the Company on the open market. At the end of 9M2017 on the balance sheet of the Lukoil group, the repurchased shares amount to 140,930ths units (12% of the capital). According to the statements of the head of Lukoil Vagit Alekperov, a decision was made to repay 100mn shares during 2018. The remaining 40mn shares are planned to be deposited to motivate management.

At the same time, the Company announced its intention to implement a new buyback. According to Lukoil, $2- $3bn will be spent on the buy back within the next five years.

Our view

In our view, the news is positive for Lukoil's share price. We believe that the planned buyback could lead to an increase in the size of the dividend. So, if our dividend forecast for 2018 was 100 rubles per share, then a buyout of about $ 600 billion per year, according to our calculations, could lead to an increase in the expected dividend by 2%.

The price of Lukoil's shares has reached our target level and on the eve of the 2017 final results we put the target price under review.