By Stephen Bierman and Anna Shiryaevskaya
“It looks like our country will face serious problems with gas exports as early as the next decade,” Deputy Chief Executive Officer Leonid Fedun said in Moscow today.
An “acute glut” of gas may arise in the next few years because of rising production of so-called unconventional fuel in the U.S. and Canada, the International Energy Agency said last month. Lukoil plans to boost gas production to about 26 percent of total output by 2019, from about 10 percent now. Its previous 10-year plan to 2016 had targeted 33 percent.
Lukoil will focus on developing new deposits and more profitable projects, Fedun said, while presenting the new strategy. The company cut planned capital expenditure, and seeks to boost accumulated free cash flow fourfold by 2019, he said.
“There were many apparently contradictory statements,” Alexander Korneev, a Moscow-based oil analyst at Citigroup Inc., said in a note to investors. It was “a disappointing strategy yet to be reflected in the share price.”
Lukoil shares fell 2.8 percent to 1643.77 rubles a share on Moscow’s Micex stock exchange.
The focus of acquisitions will shift to adding reserves, Fedun said. The company spent more than $4 billion on refineries and retail networks in the past two years.
Iraq, Kazakhstan, West Africa
Lukoil will seek production assets in Kazakhstan and West Africa, and bid for the West Qurna-2 field in Iraq, Fedun said. Lukoil had sought to have a contract for the project, which was signed and terminated under Saddam Hussein, recognized by the country’s government.
Gas production is expected to lead Lukoil’s planned output gains. The company plans to produce 2.7 million barrels of oil equivalent a day by 2019, compared with 2.2 million barrels a day now, according to the presentation on Lukoil’s Web site. The previous 10-year plan to 2016 targeted 4 million barrels a day.
Of that amount, crude and gas condensate output may rise to about 2 million barrels a day, Fedun said. Third-quarter output was 1.97 million barrels a day, according to Lukoil’s Web site.
Lukoil postponed some of its gas projects as demand slipped and the U.S. made “dynamic” developments in shale gas, Fedun said. Some existing projects boast cheaper costs than liquefied natural gas and unconventional gas projects and would provide free cash flow of over $6 billion through 2019, Fedun said. Lukoil’s largest natural gas projects are in Siberia, the Caspian Sea region and Uzbekistan in Central Asia.
Spending Cuts
Capital expenditures in exploration and production may reach $60 billion, 20 percent less than under the previous plan, according to the presentation. Investments in refining may reach $25 billion. The new strategy is based on oil at $64 per barrel.
Under the new strategy, Lukoil plans to boost refining capacity by about 3.6 percent to 72.6 million metric tons a year, or 1.46 million barrels a day, through upgrading refineries and increasing the proportion of high value products, Fedun said. The Moscow-based company had aimed to refine 2 million barrels a day under the previous plan.
Output of gasoline and diesel that meet European quality standards will increase by 39 percent in the period, Fedun told reporters in Moscow today. Fuel oil production will be cut by 14 percent, he said.
Disappointed
The presentation showed a target for accumulated free cash flow of between $45 billion and $50 billion during the 10-year period. The dividend payout ratio may increase by over 30 percent through 2019, according to the presentation.
Investors were looking for a 40 percent dividend payout ratio, Korneev said.
“I was disappointed in the lack of clarity on distribution of cash among shareholders, dividends and buybacks in the near future,” Maria Radina, a Moscow-based analyst at Nomura International Plc, said at the presentation in Moscow.
Lukoil’s third-quarter profit slumped 41 percent to $2.06 billion after world crude prices declined, missing the $2.18 billion median estimate of eight analysts surveyed by Bloomberg, the company said.
To contact the reporter on this story: Stephen Bierman in Moscow at sbierman1@bloomberg.net; Anna Shiryaevskaya in Moscow at ashiryaevska@bloomberg.net
Last Updated: December 8, 2009 13:21 EST
