LUKoil Cash Flow Queried

LUKoil will probably have to borrow or sell shares to fund expansion and pay dividends as free cash flows shrink, Troika Dialog said.

Low free cash flow generation may "severely constrain" acquisitions, while output growth at its western Siberian fields slows, Oleg Maximov and Valery Nesterov, oil analysts at the investment bank, said in a note to investors Tuesday.

The country's export and extraction taxes reduce the benefit producers get from high oil prices, while the rising cost of materials and oil-field services and a strengthening ruble eat into domestic profits.

"We would not bet that the earnings quality will meaningfully improve, even during the $90 a barrel oil price environment that we're likely to encounter in the fourth quarter of 2007," the analysts said.

LUKoil's capital expenditures will probably reach $9.1 billion per year through 2010, while dividends will probably rise to at least $1.3 billion this year, said the analysts, who cut their target price on LUKoil shares by 10 percent to $94. Troika rates the stock a "hold."

The company spent 89 percent of the $7.25 billion it generated from operating activities on its business in the first nine months of the year, reducing its free cash flow 55 percent in the first nine months to $811 million, according to financial statements released last week.

LUKoil may sell or swap new shares next year to acquire assets, chief executive Vagit Alekperov, who owns about 19 percent of the stock, said Oct. 3, according to a spokesman.

LUKoil fell 1 percent to 2,133.75 rubles ($85) on Moscow's MICEX exchange, while the MICEX index added 1.1 percent.