Lukoil/Novatek - Pair Trade Idea

We open a short-term pair-trade idea, expecting Lukoil to outperform Novatek. We reiterate our BUY rating on both stocks over a 12-month horizon.PERFORMANCE AND WHAT'S IN THE PRICEAs of the close on April 26, both Lukoil (up 14% YTD) and Novatek (up 17%) have slightly outperformed the main benchmarks, the MSCI Russian Energy and the RTS O&G Index (both up 11% YTD).WHERE WE ARE VS CONSENSUSWe are 20-30% ahead of Bloomberg consensus on Lukoil's dividend distribution in 2021-22, expecting substantially stronger FCF generation, while our forecasts for Novatek are generally more in line with the street.KEY DRIVERS AND CATALYSTSWe expect much stronger improvement in the financial performance of Lukoil in 1Q-2Q21 versus Novatek. We forecast Lukoil's 1Q21 EBITDA and FCF to rise by 52% Q-o-Q and 76% Q-o-Q, respectively, while the growth in Novatek will be relatively more moderate (+23% Q-o-Q). This will entail a much more attractive yield for Lukoil's dividends paid already this year: 9% versus 4% for Novatek. Next year, the gap will widen further, in our view, on the back of further improvement in downstream profitability starting in 2H21, which should be more beneficial for Lukoil. Novatek will report 1Q21 financials on April 28, while Lukoil reports in the last week of May.We do not expect any specific corporate events or project launchings for either company in the short term, except for the long-waited and already priced-in Yamal LNG fourth train (0.9 mln tonnes of annual capacity) for Novatek.RISKS TO OUR VIEWAn oil price correction might represent a bigger risk for Lukoil's financials than for Novatek's.An acceleration of the project pipeline from Novatek and potential news flow on new long-term LNG contracts might also represent a risk for this short-term trade.