LUKOY - Lukoil: A Possible Way Out Of The Stock

2023-09-01 02:58:22 ET

Summary

• Lukoil plans to buy back up to 25% of its shares from non-residents with a 50% discount.
• The buyback request is likely to be approved, as seen with a similar offer from Magnit.
• Non-Russian investors should consider selling their positions in Lukoil due to the uncertain political situation and potential risks in the future.

After a roughly 1.5 years-long break, I'm finally back as an author on Seeking Alpha. Despite the fact that I left Russia and refocused from Russian to American and Chinese stocks, I feel there's some unfinished business with Russian stocks for me here.

Since Russia invaded Ukraine, non-Russian investors have essentially lost access to their Russian holdings because two major clearing houses, Clearstream and Euroclear, stopped settling any transactions with Russian securities due to Western sanctions. Similarly, many Russian investors have lost access to their US and European holdings.

Nonetheless, there is a pathway on the horizon that may enable non-Russian investors to liquidate their positions in Lukoil (LUKOY).

A Massive Buyback For Non-Residents

On August 22, a news agency Interfax reported that Lukoil plans to buy up to 25% of its shares from non-residents, whose shares are currently locked on so-called "C-type" accounts. According to Interfax, Lukoil requested permission from the Russian authorities in July. It is assumed that the offer will also apply to depository receipts as well. According to the current legislation:

On August 30, Russian Deputy Prime Minister Alexander Novak confirmed that the authorities are considering the request of Lukoil to buy back the shares.

Thankfully for Lukoil investors, chances are quite high that the buyback request will be approved. This June, a Russian retail company Magnit put up an offer for non-resident investors to buy back up to 29.8% of the company's share with a 50% discount. In mid-August, Magnit reported that it successfully bought back 16.6% of all issued and outstanding shares:

Approximately 200 orders have been fulfilled - including those from investors from the USA, UK, Germany, Italy, Switzerland, Scandinavian countries, Singapore, Japan, Canada, Australia and other jurisdictions. Magnit's GDR program depositary bank, JP Morgan Chase Bank N.A., also took part in the Tender Offer as well as other international investors - long-term active management funds, passive index funds / ETFs, hedge funds, pension and sovereign wealth funds, as well as family offices and individual investors.

It should be noted that in each case the 50% discount is set in accordance with the requirements of the Russian Government Commission for the Control of Foreign Investment.

What still remains unknown regarding the potential Lukoil buyback:

• What share price will be used for a buyback
• How exactly the buyback will be performed technically
• What investors are required to do to apply for a buyback

I'll provide an update as more information becomes available. My guess is that Lukoil will set a buyback price somewhere around 6200-7000 rubles per share, which roughly equals $65-73 per share at the current USD/RUB exchange rate. With a 50% discount applied, investors will be able to sell their shares for $32-36 per stock. Again, this is just my very approximate estimate.

Should You Participate? Certainly, Yes

To exclude my negative bias towards Russia after the invasion of Ukraine as a factor, I'll put ethical considerations aside.

Anyway, I'd recommend that non-Russian investors use the upcoming opportunity to sell their position in Lukoil purely for pragmatic reasons. This war has clearly shown how investors and their ownership rights are treated by governments around the world (pretty poorly, in my opinion), which don't care much at least to provide investors with an option to liquidate their positions.

You may ask: "What if I decide to wait until the war is over and sanctions are lifted?" Well, my base-case scenario implies that the hot phase of the war may last for a few more years at the very least, with most of the sanctions against Russia lasting for around a decade. At the same time, the Russian authorities don't hesitate to openly nationalize even somewhat loyal Western companies like Danone and Carlsberg. Also, fresh news says that now the Kremlin demands bigger discounts for foreign businesses exiting Russia. Therefore, those investors who decide to keep holding their shares may one day face a risk of complete deprivation of their Russian assets, let's say, through a forced buyback with a 90-99% discount to a share price. An upcoming option to sell your Lukoil shares with a proposed 50% discount doesn't sound like a bad outcome compared to potentially worse scenarios like the one above.

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