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. Last Updated: 07/27/2016

LUKoil Releases GAAP Accounts

After numerous delays, harsh criticism from investors and a beating on the stock market, Russia's No. 1 oil company LUKoil on Tuesday finally released its 1998-1999 financials audited to Western accounting standards.

But some market watchers said they were disappointed by the lack of details in the much-anticipated report, which was sent out as a news release instead of the typical sheaf of documents that include pages of substantive notes.

LUKoil said it made a 1999 profit of $1.06 billion on $7.3 billion in revenues under U.S. generally accepted accounting standards, or GAAP. The profit was a 46 percent increase from 1998, when the company earned $729 million on $6.6 billion in revenues.

"An increase in operating activities resulted largely from the improved situation on world energy markets and the rising demand and prices for oil," LUKoil said in a statement. "The significant improvement of the economic situation in Russia and the stable microeconomic growth in 1999 have also significantly influenced the increase in income from the main lines of business."

LUKoil's board of directors adopted and then released the company's consolidated financial statements for its more than 380 subsidiaries and affiliates at a meeting in Baku on Tuesday. They had originally promised to release the figures by last fall.

Big Five accounting firm KPMG signed off on the financials without any qualifications.

The stock market reacted unenthusiastically to LUKoil's announcement, with LUKoil ordinary shares gaining 1.5 percent to close at $9.90. The stock is down substantially from October, when it was trading at around $15. The RTS index fell 0.11 percent to 175.18.

Leonid Mirzoyan, an oil analyst with Deutsche Bank, said LUKoil displayed a lack of professionalism in the manner it released the report.

"They should have accompanied the release with some kind of conference call." Mirzoyan said. "Where are the profit-and-loss and cash-flow statements? Where is the balance sheet? It is this kind of information that lets us on to the company's nuances."

But the release of the report does bode well for LUKoil's bid to get a $150 million loan released by the European Bank for Reconstruction and Development, a three-year loan promised in May but frozen until LUKoil released its 1998-1999 reports audited to GAAP.

"This will remove the last obstacle to the disbursement of the loan to LUKoil," said an EBRD spokesman. "But no formal announcement will be made for several weeks, until EBRD bankers gather to examine the full accounts."

"We regard this as a major landmark in the bank's efforts to achieve greater corporate transparency in Russia," the spokesman added.

LUKoil spokesman Dmitry Dolgov declined to say when the financials would be released in full.

"It's a big document," Dolgov said. "It would be difficult to publish all at once."

Steven Dashevsky, an oil analyst with the brokerage Aton, said he expected the full accounts to be published in the next several days.

"What is important is that the results show that there are no skeletons in the closet," Dashevsky said. "Of course, the detailed notes are key, but overall, the numbers are good."

Aton kept its rating of LUKoil stock at "Hold" on Tuesday due to an oversupply of the stock on the market.

"However, we will thoroughly review our recommendation for a possible upgrade upon more detailed analysis of the full 1998-1999 disclosure," the brokerage said in a research note.

Stephen O'Sullivan, an oil analyst with United Financial Group, said LUKoil's net profit under GAAP — $1.06 billion — is in line with its earlier reported profit of $1.11 billion under Russian Accounting Standards, or RAS.

Although the summaries released Tuesday cleared up some questions about LUKoil's finances, they did not shed any light on its relationship with Reforma Investments, an offshore vehicle that purchased a 9 percent stake in LUKoil during a privatization auction in 1999. Industry insiders suspect that Reforma is controlled by LUKoil management, an accusation LUKoil has denied.

Mirzoyan with Deutsche Bank said that U.S. GAAP regulations do not require revealing "arm's length ownership," meaning that the existence of Reforma Investments as a shareholder must be revealed but no explanation about Reforma's ownership is required.

Also, Mirzoyan said, the release of the LUKoil financials paves the way for the government to go ahead with a plan to float LUKoil shares as American Depository Receipts. The government wants to place its last stake in LUKoil — worth 6 percent — on the New York Stock Exchange.

However, listing on the New York Stock Exchange would require an examination of all ownership links, including that of Reforma's, Mirzoyan said.