OAO Lukoil

The frame as of 28/10/2013 (1 € = 1.34 $):

market capitalization: 36.2 € Billion vs. 53.2 € Billion (as of 31/12/2012)

What makes a P/B value of 0.68 (minus all intangible assets P/B value of 0.69)

P/E ratio: 4.5 (Price: 48.0 €; EPS: 10.61 €)

Net Margin (before extraordinary items, as reported): 8.0%

Net Margin (after extraordinary items): 7.9%

Divident yield: 4.3% (Dividend 2012 / Closing price on the 28/10/2013)

Earnings:

Lukoil is reporting a positive result for the last 5 years or more and is paying dividends for the same period as well.

The companies revenue of 100.8 € Billion in 2012 are mostly (98%) generated by exploring, redefining and distribution of oil. The income is generated by those activities as well.

The sales went to 84% to customers outside of russia.

The result in 2012 of 8.2 € Billion (including a small loss from other comprehensive of 0.01 € Billion) or 10.61 € per share.

The balance sheet:

Assets

Receivables 9%

Inventories 8%

Plant / Equipment 67%

Cash 3%

Total Assets: 74 € Billion

vs.

Liabilities

Equity 74%

Long term finanical liabilities 6%

Trade liabilities 7%

Total Liabilities: 74 € Billion

The company´s plants are depreciated to 66% while it is investing heavily (around 100% up from 2010 and three times more then it is depreciating) than it is depreciating.

 The 74% of equity do easily cover Lukoil´s long term assets. Till 2015 Lukoil has CAPEX liabilities of 2.1 € Billion compared an operating cash flow of 14.2 € Billion.

Cash Flow:

The operative generated Cash Flow (before changes in assets and liabilities) of 12.3 € Billion covers the Cash Flow from investing activities (9.8 € Billion) as their dividend payments (2.1 € Billion).

Vertical integrated group; income taxes are a critical value – while they depend on the government tax rules; exploratory costs are capitalized

The management:

 Mr Alekperov, President and stakeholder of around 20% of the company´s equity announced just in the beginning of that year (2013) that he respectively his soon will keep his stake long-term. Another 9.3% are owned by the Head of Strategy Mr Fedun.

 The free float of the companies shares is 50.00 %

Conclusion:

Cheap on a P/E basis. Sufficient margin of safety of around 30% under book value. Strong equity base and operating Cash Flow. The company´s proved reserves allow them to stay in business for more than 12 years without exploring new oil fields.

Possible threats can arise from tax legislations, disasters ala Platform “Deepwater” and a decreasing oil price.

Finally I reckon to buy Lukoil (what I will do tomorrow as well).

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Books (most recent first)

The Intelligent Investor: The Definitive Book on Value Investing, Benjamin Graham, ISBN 978-0060555665

Die Kunst des klaren Denkens: 52 Denkfehler, die Sie besser anderen überlassen, Rolf Dobelli, ISBN 978-3446426825

Tap Dancing to Work: Warren Buffett on Practically Everything, Warren E. Buffett, ISBN 978-1591845737

Die Kunst des klugen Handelns: 52 Irrwege, die Sie besser anderen überlassen, Rolf Dobelli, ISBN 978-3446432055

Billionenpoker: Wie Banken und Staaten die Welt mit Geld überschwemmen – und uns arm machen, Ullrich Fichtner. Cordt Schnibben, ISBN 978-3421045768

Articles (alphabetic order)

Behavioral Portfolio Management: Emotions and Volatility Are Key to Successful Implementation, Jason Voss, 12.06.2013

http://blogs.cfainstitute.org/investor/2013/06/12/behavioral-portfolio-management-emotions-and-volatility-are-key-to-successful-implementation/

BOJ Asset Purchases: Is Japan Sowing Seeds of Next Asset Bubble?, Ron Rimkus, 06.05.2013

http://blogs.cfainstitute.org/investor/2013/05/06/boj-asset-purchases-is-japan-sowing-seeds-of-next-asset-bubble/

Following the Bubble: Today’s QE-conomy (Ver 3.0), Ron Rimkus, 17.06.2013

http://blogs.cfainstitute.org/investor/2013/06/17/following-the-bubble-todays-qe-conomy-ver-3-0/

Investment Risk in the Real World, Lauren Foster, 23.05.2013

http://annual.cfainstitute.org/2013/05/23/investment-risk-in-the-real-world/

E.ON SE (stock)

The frame as of the 26/08/2013:

market capitalization: 24.3 € Billion vs. book value: 34.9 € Billion (as of 30/06/2013)

What makes a P/B value of 0.70 (minus all intangible assets P/B value of 1.57)

P/E ratio: 10.6 (Closing price on the 26/08/2013; Earnings for the fiscal year 2012 as reported)

Net Margin (before extraordinary items, as reported): 3.2%

Net Margin (after extraordinary items): 2.0%

Divident yield: 9.1% (Dividend 2012 / Closing price on the 26/08/2013)

Earnings:

E.ON SE reported a positive annual result within the past seven years except one year and is paying dividends since 1998.

Their revenues of € 132 billion in 2012 emerged by 48% through the business unit “optimization and trade” where the company is selling and buying different kinds of energy as well as emission permits. 29% by sales in Germany and another 17% by sales in further European Countries.

The “production” division with sales of just 2% generated 27% of the company´s operating cash flow before interest and tax and just slightly less than the sales division of Germany with 28%. The other European Countries were responsible for another 18% of Cash Flow.

The result in for the year ending on the 31/12/2012 was € 2.6 billion before minorities. This result does include earnings of € 0.9 billion earned by the sale of investments and appreciation of fixed assets. The interest burden of € 1.3 billion was just earned twice for the fiscal year 2012 and the ratio gets even worst by deducting the previously described € 0.9 billion.

The balance sheet:

Assets

14% Goodwill and intangible assets

39% Fixed tangible assets

17% Receivables

Total assets: € 140.4 billion

vs.

Liabilities

25% Equity

3% Minorities

16% Long term financial liabilities

17% other provisions

19% trade liabilities

Total liabilities: € 140.4 billion

Compared to the initial value fixed assets are depreciated to 52% while the company is currently investing more than it is depreciating and amortising.

The working capital (current assets – current liabilities) showed a positive figure of € 7.3 billion.

The moderate equity rate of 25% was in 2012 stressed by a charge of € 1.9 billion due to a change of assumptions of the pensions fund.

The cash flow statement:

Based on the 2012 annual report we calculated an expected cash flow for the upcoming years of € 8.5 billion. That covered the year´s Investments of € 6.4 billion and the paid dividend of € 2.1 billion. According to the company´s strategic aims and the cash flow statement, it is currently reducing their debt burden.

 

The management:

The CEO Mr Teyssen is pointing out a strategic change in europe according to a switch to renewable energy. He studied economics and law and reached a doctoral degree in law from the University of Göttingen.

The CFO Mr Schenk arrived at the E.ON SE in the end of 2006. Previously he studied economics, reached a doctoral degree and was working as a partner at Goldman Sachs.

 

The conclusion:

The stock is priced with an attractive P/E ratio, a still acceptable P/B value after intangibles and a extraordinary Div yield based on the latest payment. The interest burden compared to the companies EBIT is fairly tough as well as the net earnings of € 2.6 billion which includes an extraordinary profit of € 0.9 billion.

The company passes the golden balance sheet rule roughly and is focused on reducing their financial debts (but has to invest in renewable plants at the same time which puts the company´s position under financial pressure).

The cash flow´s in good size to company´s pocket especially through their fossil energy production sites.

As Mr Teyssen it already pointed out in the letter to the shareholder, E.ON is at an changing situation with underlying risks as well as opportunities.

 

I think E.ON has the needed size and management to undergo that change, I think people will need in the future even more (especially) electric energy and according to Mr Graham´s philosophy: I would be still satisfied to get the next quote in ten years time for a share in that company, so I bought some of the E.ON SE pie.