Lukoil beats Q1 2017 profit view, cuts production in Iraq

Last week, Russia’s second-largest oil producer, Lukoil (LUKOY, LKOD.LS) reported better than anticipated fiscal 2017 first-quarter earnings, compared to last year. The revenue in the March 2017 quarter grew 21.7% on y-o-y basis.

However, the stock has not reacted positively to the impressive earnings. Obviously, the weak outlook for oil is keeping the stock in a bearish orbit. Still, we expect the stock to move up in the days ahead due to reasons mentioned below.

The Moscow-based company reported fiscal 2017 first-quarter revenues of 1.43 trillion Rubles, up from 1.18 trillion Rubles in the corresponding quarter last year.

Aided by a decrease in operating and transportation expenses, among other, Lukoil posted Q1 2017 profit from operations of 126.87 billion Rubles, compared with 107.64 billion Rubles in Q1 2016.

Lukoil Kartica

Net profit in Q1 2017 increased to 62.31 billion Rubles, from 42.83 billion Rubles, and greater than Thomson Reuters’ estimates of 50 billion Rubles. Including foreign exchange currency translation difference, the total comprehensive

income in the recent quarter was 43.35 billion Rubles, up 15.93 billion Rubles on y-o-y basis.

In spite of the impressive results, the stock continues to hover around $48 mainly due to weak crude oil prices. However, the price of crude seems to have bottomed out in the short-term, as evident from yesterday’s reversal. Additionally, in line with the OPEC-Russia agreement to extend the production cut, Lukoil has announced that it would reduce production in Iraq from this week onwards. Even though the company did not divulge details of production cut, still, it is expected to prevent the oil from falling further.

The integrated vertical oil & gas company is also in talks with Saudi Arabia’s Aramco to purchase crude oil for its refineries in Europe. Additionally, through a swap deal, Lukoil will also start transporting Iranian crude to its European refineries. Thus, considering the strong performance and expansion of operations, we expect the stock to remain range bound with bullish bias.

Technically, the MACD indicator has formed a positive divergence with the price. Additionally, the stochastic RSI indicator is rising out of the bearish zone. The price chart also indicates firm support for the stock at 48 levels. Thus, we expect the stock to rally in the short-term.

In order to capitalize on the uptrend, we wish to buy a call option from a reliable binary broker. Additionally, we would look for a strike price of about $48 and an option expiration date of June 20th.

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