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Standard & Poor’s Ratings Services has revised its outlook on Lukoil OAO, Russia’s largest vertically integrated oil major, to positive from stable.

At the same time, the single-‘B’-plus long-term corporate credit rating on LUKoil was affirmed.

“The outlook change is supported by management’s recent measures to improve the company’s overall cost structure, as well as by Lukoil’s relatively prudent debt-maturity profile and historically sound cashflow generation,” says Eric Tanguy, a Standard & Poor’s credit analyst.

It also reflects the general improvement in the operating and fiscal environment for Russian oil companies. Standard & Poor’s will continue to monitor Lukoil’s ability to generate sufficient after-tax cash from operations to finance its capital-expenditure requirements, ambitious expansion plans, and financial-debt obligations especially if crude prices decrease significantly from their current high levels, as Standard & Poor’s expects.

“Any rating upgrade would be subject to Lukoil self-financing its investments, including within the framework of Standard & Poor’s mid-cycle crude scenario,” adds Tanguy. Lukoil is Russia’s largest oil company in terms of crude reserves, production, and exports.

In 2001, Lukoil produced 78.3mn tons of crude oil (1.58mn barrels per day) from its considerable reserves, which totalled 14.6bn barrels at year-end. The company exported 30% of its oil production as crude (excluding deliveries to group refineries in the Ukraine and in Eastern Europe) and 25% as refined products (including the production of group refineries in the Ukraine and in Eastern Europe).

Most of the company’s current upstream assets are located in Russia, but the group intends to develop contributions from other countries (primarily Azerbaijan and Kazakhstan) in the medium term. LUKoil’s credit quality benefits primarily from the company’s ability to export large crude-oil volumes (generating hard-currency revenues of US$3.9bn in 2001), complemented by exports of refined products (US$4.9bn revenues in 2001), as well as from strong profitability during the past two years, the company’s programme to upgrade its key assets, a good level of domestic and international downstream integration, and improved reporting transparency with the release of quarterly US-GAAP figures since March 2001.

Credit quality remains constrained, however, by the domestic oil industry’s volatile tax and regulatory environment, as well as by production and refining costs, which are currently no better than the industry average and could suffer from the rouble’s continuous real-term appreciation. Lukoil’s high and growing debt burden, significant capital-expenditure requirements and an aggressive expansion strategy; and exclusive reliance on crude, also weigh on the ratings.