Lukoil: No Plans to Buy All of its Shares from ConocoPhillips

MOSCOW (Dow Jones Newswires), Aug. 31, 2010

Russia's biggest privately owned oil producer, Lukoil Holdings, won't fully execute an option to buy back its shares from ConocoPhillips, the company said Tuesday.

The U.S. oil major said earlier this year it would begin shedding its 20% stake in Lukoil--which it has held since 2006--as part of a major restructuring program.

Under the plan, Lukoil earlier this month spent $3.44 billion to buy 7.6% of its shares from ConocoPhillips. The U.S. oil company will sell the rest on the open market or to the Russian company, which holds an option to buy the lot before Sept. 26 at $56 a share.

Lukoil's shares were trading 1.7% lower at $53.1 each in London at 1319 GMT.

"We will not use (the option) in the volume that ConocoPhillips offered. We're not going to spend big money on this," Lukoil's Vice President Leonid Fedun said.

"No significant debt" will be raised to finance a buyback, Fedun said. The company views the shares already bought as a financial reserve that could be used for acquisition purposes, but said that they may be gradually canceled.

No final decision on Conoco's remaining stake has been made yet, but Lukoil said it could buy shares on the open market.

Many analysts had expected Lukoil to buy the whole stake from Conoco to avoid putting additional pressure on its stock.

Credit-rating agency Standard & Poor's has said that Lukoil could lose its credit rating if it raises new debt to purchase the remaining stake from Conoco. The agency has Lukoil's BBB- rating on "credit watch with negative implications."

"I think they don't want to lose their credit rating," Alfa Bank analyst Pavel Sorokin said of Lukoil.

Earlier Tuesday, Lukoil said its net profit for the second quarter fell 16% to $1.95 billion compared with the same period a year earlier, due to higher taxes and export duties, strengthening of the ruble and rising transportation costs.

Growth in global oil prices helped drive revenue 29% higher in the period to $25.85 billion compared with the year-earlier period.

Lukoil's oil production continued to fall, however, as output from new projects failed to offset lower production in Western Siberia--the company's main production region.

The company produced 1.951 million barrels a day in the second quarter, compared to 1.985 million barrels a day in the second quarter last year.

With low growth opportunities inside Russia due to high taxes and limited access to offshore projects, the company has focused on international expansion, primarily in Iraq and in West Africa.

Lukoil presented a new strategy in December last year aimed at strengthening its financial position by focusing on high-yield projects and increasing cash flows and payouts to shareholders.

But analysts said that still unattractive dividends combined with an unwillingness to buy back shares may disappoint investors.

"Unlike other value players, Lukoil has not offered attractive dividends and is not prepared to buy back its shares," said Evgenia Dyshlyuk, analyst at TKB Capital. "The company's guidance is quite contradicting and raises a number of questions regarding the company's direction."

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