Fitch Ratings has assigned Lukoil Capital DAC's upcoming notes a senior unsecured rating of 'BBB+'.

The proposed notes will be unconditionally and irrevocably guaranteed by PJSC Lukoil (BBB+/Stable), and will rank pari passu with all other unsubordinated and unsecured debt of Lukoil. The proceeds from the notes are expected to be used by Lukoil for general corporate purposes.

Lukoil is a large, integrated oil and gas company based in Russia with operating assets across Russia, and the broader EMEA region including western Europe. We expect Lukoil's credit profile to remain robust in the medium term, given the company's low leverage and competitive cost profile. We rate Lukoil one notch above Russia's 'BBB' Country Ceiling, due to its strong external hard-currency debt-service capacity.

Key Rating Drivers

EBITDA To Exceed Pre-Pandemic Levels: Lukoil's Fitch-calculated EBITDA fell 50% yoy in 2020 to RUB580 billion, due to declines in realised oil prices and in oil and gas production volumes and refinery throughput. We project that Lukoil's EBITDA in 2021 will exceed its pre-pandemic levels, driven by both recovery in upstream and downstream activities, along with recovering oil prices.

Strong Business Profile: Lukoil has large production size (2.1 million of total daily hydrocarbon production on a barrel of oil-equivalent basis (mboepd) in 2020, excluding West Qurna-2 in Iraq and equity affiliates), low production cost (sub-USD4) and upstream capex (sub-USD7) per barrel of oil-equivalent produced. Most of its upstream assets are located in Russia, with its asset base geologically diversified. It has brownfield sites mainly in western Siberia and greenfield projects on the Caspian Sea and in the Timan-Pechora basin, the Baltic Sea, and west Siberia.

Its robust reserve life of 20 years is above international majors'. It also has sizable downstream operations in Russia and abroad. The rating also reflects Lukoil's concentration on Russia and the risks related to the country's operating environment.

Very Low Leverage: Lukoil has maintained one of the lowest leverage levels among global peers with funds from operations (FFO) net leverage at 0.5x on average for the last decade. We expect net leverage to average 0.1x from 2021 to 2024, due to its conservative strategy focused on organic growth with small acquisitions relative to the company's size, both abroad and in the domestic market, and strong financial discipline. Net debt was very low at end-2020; we forecast net debt will increase only marginally. Lukoil's strategy remains predicated on a long-term oil price assumption of USD50/bbl, marginal growth in the upstream business and a further enhancement of refining and petrochemical operations.

FCF-Based Dividend Policy: Lukoil's dividend policy dictates a semi-annual distribution of at least 100% of free cash flow (FCF; defined as operating cash flow after capex, interest, lease and share buybacks). This yielded a lower dividend in 2020, but may lead to temporarily negative post-dividend FCF in case of large market volatility. However, we view this proportional dividend policy to be more favourable than less flexible dividend regimes with fixed dividend growth targets.

Major Integrated Oil Company: Lukoil is Russia's largest privately-owned oil company, and is one of the world's largest oil and gas producers. Its total hydrocarbon production is comparable to that of Total Energies SE (AA-/Stable) and BP plc (A/Stable) but higher than Eni SpA's (A-/Stable) and ConocoPhillips' (A/Stable). Lukoil has notable integration into downstream operations, both in Russia and abroad, and has a large trading business. Lukoil's upstream production remains heavily exposed to Russia at around 90% of output.

Rating Above the Country Ceiling: We rate Lukoil one notch above Russia's 'BBB' Country Ceiling, in line with Fitch's 'Non-Financial Corporates Exceeding the Country Ceiling Rating Criteria'. This reflects a combination of high export hard-currency EBITDA, EBITDA from overseas operations (in countries rated BB and above), substantial hard-currency cash balances held abroad and large committed hard-currency facilities from high-rated foreign banks.

Derivation Summary

Lukoil is well-positioned within the Russian domestic exploration and production sector. Its 2020 upstream production volumes of 2.1mboepd (excluding West-Qurna 2 and affiliates) compares favourably with that of peers such as PAO Novatek (BBB/Stable), which produced 871kboepd during 2020, as well as with PJSC Gazprom Neft (BBB/Stable), which produced 1.4mboepd during 2020. While Lukoil's 1P reserve life of 20 years as of end-2020 was average relative to Gazprom Neft's 24 years and Novatek's 26 years, this is substantially offset by Lukoil's leading position in the downstream segment. It also has a filling station network of around 5,000 stations compared with around 2,000 for Gazprom Neft.

Lukoil also compares favourably with EMEA oil majors, notwithstanding the rating constraints inherent to being a primarily Russia-based producer with exposure to Russia's operating environment.

Lukoil's 2020 production volumes of 2.1mboepd (excluding West-Qurna 2 and affiliates) were in line with those of Total Energies (2.2mboepd), and BP (2.2mboepd), while being substantially higher than Eni SpA's (A-/Stable) production base of 1.5mboepd. Lukoil's 1P reserve life of 20 years is substantially above that of most majors of around nine-10 years. Lukoil's consistently low FFO net leverage of under 0.5x is significantly lower than majors', which typically have leverage above 1.0x.

Key Assumptions

Oil and gas prices of 2021-2024 in line with Fitch's base case price deck

Upstream production averaging 2.1mboepd from 2021 to 2024

Capex averaging around RUB500 billion per annum between 2021 and 2024

Dividend payments in line with the current dividend policy

USD/RUB exchange rate of 73.8 in 2021, gradually easing to 72 in 2023

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A further upgrade is unlikely given Lukoil's high asset concentration in Russia.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A fall in external hard-currency debt-service coverage to below 1.5x.

Aggressive investments, acquisitions or dividends, resulting in FFO net leverage exceeding 2x.

A significant increase in industry-related taxes in Russia leading to material deterioration of credit metrics.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Strong Liquidity: As of end-1H21, Lukoil had RUB294 billion of undrawn committed credit facilities and RUB555 billion of cash available. These amounts, alongside expected FCF generation, are sufficient to cover debt maturities in 2021-2022.

Issuer Profile

Lukoil is a large, integrated oil & gas company with operations concentrated in Russia, but active in over 30 countries across the globe. Its 2020 hydrocarbon production averaged 2.1mboepd, with a 1P reserve life of 20 years; while refining throughput was 1.2mboepd.

ESG CONSIDERATIONS

The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

Date of Relevant Committee

18 June 2021

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

RATING ACTIONSENTITY/DEBT	RATING

Lukoil Capital DAC

senior unsecured

LT	BBB+ 	New Rating

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

PARTICIPATION STATUS

The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.

APPLICABLE CRITERIA

Non-Financial Corporates Exceeding the Country Ceiling Rating Criteria (pub. 09 Jan 2021)

Corporates Recovery Ratings and Instrument Ratings Criteria (pub. 09 Apr 2021) (including rating assumption sensitivity)

Corporate Rating Criteria (pub. 16 Oct 2021) (including rating assumption sensitivity)

Sector Navigators - Addendum to the Corporate Rating Criteria (pub. 16 Oct 2021)

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)

ADDITIONAL DISCLOSURES

Solicitation Status

Endorsement Policy

ENDORSEMENT STATUS

PJSC Lukoil 	UK Issued, EU Endorsed

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