The company’s EBITDA is expected to reach USD 15.7 billion in 2010.

Russia’s private oil company Lukoil will keep its current investment ratings, according to analysts at two credit agencies.

In the end of July, Standard & Poor’ announced it intends to reassess the long-term corporate rating of Lukoil, currently held at BBB- with a “negative” outlook. If the company receives a lower score from the agency, its rating will be below investment-grade.

The other two big agencies Moody’s and Fitch give good investment-grade ratings to Lukoil. Moody’s rating is now at Baa2, and Fitch’s at BBB-. The national scale rating remains at ruAA+.

The Russian oil producer was included on the CreditWatch list after announcing that Lukoil Finance LTD. will buy 7.6 percent of Lukoil’s shares from Springtime Holdings Ltd., a company affiliated with ConocoPhillips. The transaction was valued at USD 3.4 billion. Lukoil went through with the transaction in August 2010. The company also acquired an option to buy another 11.6 percent of its shares represented by American Depositary Receipts worth USD 5.529 billion by September 26; however Lukoil’s President Vagit Alekperov said that the company is not likely to exercise the option.

According to analysts at Troika Dialog, the opinion of rating agencies is not viewed by the Russian oil producer as a major concern in orchestrating the buyback transaction. At the same time, it would be highly desirable for Lukoil to keep positive assessments of its investment potential from at least two credit agencies. Standard & Poor’ analysts indicated that a downward reduction of company ratings would only be possible if Lukoil exercises the option to buy back the 11.6-percent stake. Analysts are optimistic about Lukoil’s keeping investment-grade ratings from two of the three agencies. The prevailing opinion is that Standard & Poor’ did not react adequately to the news of Lukoil’s intentions to purchase back its shares. While it is generally a rule that a company’s repurchase of its own shares negatively impacts its credit rating, Lukoil’s performance figures would not justify the rating downgrade. Even if the Russian oil company were to purchase the second lot of shares, the debt-to-EBITDA ratio would rise only to 1.3, a perfectly acceptable level for an investment-grade rating.   

According to one more Russian investment company VTB Capital, even if Lukoil reacquired all 19.2 percent at the suggested price of USD 9 billion, the company could still manage to preserve its debt- to-EBITDA ratio at below 1. The Russian company’s position will be even more strengthened if Italy’s ERG fails to exercise its put option to sell to Lukoil its share in the two companies’ JV project. The transaction contemplated by ERG’s option that remains valid until 2014 would require Lukoil to pay nearly USD 2 billion to its Italian partner. Lukoil’s current debt load is USD 7 billion. The company’s EBITDA is expected to reach USD 15.7 billion in 2010, attributable in part to the company’s ventures outside of Russia.

The report from Standard & Poor’ does not state what level of indebtedness would be considered acceptable for Lukoil. The agency’s report also does not seem to take into account Lukoil’s credit capabilities and does not reference the company’s USD 5-billion credit line with Sberbank. The company has positive free cash flow and enjoys the capability of accessing capital markets.  Lukoil can easily sell off its stock and increase low-interest long term debt. In view of these factors, it is unlikely that the company’s investment-grade rating will be reduced.