Fitch Ratings has assigned
The proposed notes will be unconditionally and irrevocably guaranteed by
Lukoil is a large, integrated oil and gas company based in
Key Rating Drivers
EBITDA To Exceed Pre-Pandemic Levels: Lukoil's Fitch-calculated EBITDA fell 50% yoy in 2020 to
Strong Business Profile: Lukoil has large production size (2.1 million of total daily hydrocarbon production on a barrel of oil-equivalent basis (mboepd) in 2020, excluding West Qurna-2 in
Its robust reserve life of 20 years is above international majors'. It also has sizable downstream operations in
Very Low Leverage: Lukoil has maintained one of the lowest leverage levels among global peers with funds from operations (FFO) net leverage at 0.5x on average for the last decade. We expect net leverage to average 0.1x from 2021 to 2024, due to its conservative strategy focused on organic growth with small acquisitions relative to the company's size, both abroad and in the domestic market, and strong financial discipline. Net debt was very low at end-2020; we forecast net debt will increase only marginally. Lukoil's strategy remains predicated on a long-term oil price assumption of
FCF-Based Dividend Policy: Lukoil's dividend policy dictates a semi-annual distribution of at least 100% of free cash flow (FCF; defined as operating cash flow after capex, interest, lease and share buybacks). This yielded a lower dividend in 2020, but may lead to temporarily negative post-dividend FCF in case of large market volatility. However, we view this proportional dividend policy to be more favourable than less flexible dividend regimes with fixed dividend growth targets.
Rating Above the Country Ceiling: We rate Lukoil one notch above
Derivation Summary
Lukoil is well-positioned within the Russian domestic exploration and production sector. Its 2020 upstream production volumes of 2.1mboepd (excluding West-Qurna 2 and affiliates) compares favourably with that of peers such as PAO Novatek (BBB/Stable), which produced 871kboepd during 2020, as well as with PJSC Gazprom Neft (BBB/Stable), which produced 1.4mboepd during 2020. While Lukoil's 1P reserve life of 20 years as of end-2020 was average relative to
Lukoil also compares favourably with EMEA oil majors, notwithstanding the rating constraints inherent to being a primarily
Lukoil's 2020 production volumes of 2.1mboepd (excluding West-Qurna 2 and affiliates) were in line with those of Total Energies (2.2mboepd), and
Key Assumptions
Oil and gas prices of 2021-2024 in line with Fitch's base case price deck
Upstream production averaging 2.1mboepd from 2021 to 2024
Capex averaging around
Dividend payments in line with the current dividend policy
USD/RUB exchange rate of 73.8 in 2021, gradually easing to 72 in 2023
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A further upgrade is unlikely given Lukoil's high asset concentration in
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A fall in external hard-currency debt-service coverage to below 1.5x.
Aggressive investments, acquisitions or dividends, resulting in FFO net leverage exceeding 2x.
A significant increase in industry-related taxes in
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Strong Liquidity: As of end-1H21, Lukoil had
Issuer Profile
Lukoil is a large, integrated oil & gas company with operations concentrated in
ESG CONSIDERATIONS
The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
RATING ACTIONSENTITY/DEBT RATING
Lukoil Capital DAC
senior unsecured
LT BBB+ New Rating
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.
APPLICABLE CRITERIA
Non-Financial Corporates Exceeding the Country Ceiling Rating Criteria (pub.
Corporates Recovery Ratings and Instrument Ratings Criteria (pub.
Corporate Rating Criteria (pub.
Sector Navigators - Addendum to the Corporate Rating Criteria (pub.
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)
ADDITIONAL DISCLOSURES
Solicitation Status
Endorsement Policy
ENDORSEMENT STATUS
PJSC Lukoil UK Issued, EU Endorsed
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