Standard & Poor’s Ratings Services has raised its corporate credit rating on Lukoil OAO (LUKoil) to ‘BB’ from ‘BB-‘, and affirmed the ‘ruAA’ national scale rating on the group. The outlook is stable.

“The rating action recognises the general improvement in the operating and fiscal environment for Russian oil companies, and, following clarifications of Lukoil’s financial policy, reflects our expectation that the group will keep credit ratios in line with its new rating in a mid-cycle scenario assuming a Brent price at US$18 per barrel,” says Standard & Poor’s credit analyst Eric Tanguy. “It is supported by Lukoil’s historically sound cashflow generation, management’s ongoing measures to improve overall cost structure, and a focus on increasing exports and returns.”

The ‘BB’ rating reflects Lukoil’s standing as Russia’s second largest oil company in terms of production and exports (largest by reserves), tempered by its moderate costs structure and leveraged financial profile.

Lukoil’s credit quality benefits primarily from the group’s ability to export large crude-oil volumes complemented by exports of refined products, as well as from its recent strong profitability, programme to improve key group assets, good level of domestic and international downstream integration, and improved reporting transparency. Factors constraining Lukoil’s credit quality include a volatile tax and regulatory environment, production and refining costs no better than industry average, the group’s significant debt burden and capital-expenditure requirements for its aggressive expansion strategy, and its almost exclusive reliance on crude. The Russian Federation’s ownership of 7.6% of Lukoil’s common stock is a neutral rating factor.

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 currently high levels. The current rating factors in the expectation that Lukoil will self-finance its investments within the framework of Standard & Poor’s mid-cycle crude scenario (US$18 per barrel of Brent). The rating encompasses the expectation of only a moderate amount of external acquisitions and that the company’s general capital spending will be restrained if such acquisitions take place.