LUKoil confirmed at BUY, TP RUB 8,700 - Capex cut to support FCF making yields look attractive

We believe that in spite of the drop in crude oil prices in 1Q 20, LUKoil could maintain attractive dividend payments in 2020e-22e thanks to the new dividend policy and control of capital expenditures. In particular, LUKoil is expected to reduce its 2020e investment program by USD 1.5 bn through a cut in capex for future projects, which should not affect the companys current production plans. At the same time, the reduction in capex should support its free cash flows, which, according to LUKoils new dividend policy, will be fully distributed to shareholders. Besides, currently LUKoil has a close to zero debt burden, which makes it possible to finance the remaining buyback program (over USD 430 mn per year in 2020e-22e) by debt, while the full FCF can be spent on dividends. As a result, we expect that in the next three years LUKoil will spend over 100% of its free cash flow on payments to shareholders. Overall, we estimate that even with the decrease in 2020e DPS to RUB 495/share (vs RUB 542/share for 2019e), LUKoil will still bring a significant dividend yield of 9.7%, while the total yield (incl. buyback per share) could be double-digit at 10.6%. Moreover, for 2021e the company might offer RUB 605/share or 11.9% yield, whereas for 2022e total payments could come in at RUB 835/share, in case of oil price rebound, bringing over 16%. Overall, we have confirmed our BUY recommendation for DRs and local shares but decreased our DCF-based target price to USD 117 (from USD 133). However, we have increased our TP for local shares to RUB 8,700 (from 8,100) due to the depreciation of the rouble.