The two I have written up here are solid companies worthy of holding in your portfolio. Unfortunately, in 1Q05, they, like other top quality integrated oil companies, are, in my view, too pricey to buy.

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LUKOY LUKoil: Russia's biggest oil company as well as reliable and highly efficient.
TNT Tatneft: Major producer, refiner and marketer of Russian oil in Tatarstan.

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LUKoil (OTCBB: LUKOY)

LUKOIL is a completely integrated oil company. Today, at a closing price of $135.50, the market cap is $29.1 billion. It has over 90,000 employees; 20 percent of all oil produced in Russia (460 million barrels); 12 pct of all the petroleum products produced in Russia, including 30 pct of all motor oils; about 1,000 gasoline filling stations in Russia and the other ex-Soviet republics; and operations in 30 regions of Russia and 16 other countries.

There is no credibility issue with this company. Seven years ago, LUKoil's proven oil reserves were estimated at 10.7 billion barrels and the total (including probable and possible) reserves, at 17.7 billion barrels. Independent engineers Miller & Lents (USA) have audited all LUKoil oil & gas reserves according to world standards.

And based on International Accounting Standards, net income for the third (most recent) quarter rose to $1.4 billion from $701 million a year ago. Revenue rose to $9.8 billion from $6.4 billion in the same period last year. These are even USD, although Russians today prefer to hold Rubles.

Relative to the Integrated Oils averages (sub-industry id= 10102010), LUKOY compares super favorably. PE (forward) = 7.2 vs 12.0 for the industry, and 11.8 (ttm) vs 13.0. The return on assets is 17.8 vs 12.1 (industry) and return on equity is 26.4 vs. 23.8. The dividend yield is 2.4 pct vs 2.3 pct (industry).

Gross margin is 57.0 pct vs 18.9 pct (industry), and net margin is 16.7 pct vs 8.8 pct.

What's not to like?

Last year most every large oil company in the world wanted to buy a piece of LUKoil, but ConocoPhillips (NYSE: COP) ended a Government auction last September winning a 7.6 pct stake, which was increased to 10.0 percent in January. Within about three years, ConocoPhillips plans to raise its ownership stake to 20 percent.

Not a bad plan.

Foreign companies eager to boost production clearly see Russia as one of the great frontiers for development. By some estimates, the country may even hold over 200 billion barrels of oil plus the world's largest reserves of natural gas.

As acquisition costs are around $1.30 per barrel based on the ConocoPhillips' deal, compared with $4.90 per barrel in the U.S., (estimates Moscow investment bank Troika Dialog), Russian oil is cheap. But, like many of Russia's most valuable natural resources, you have to be partnered with a Russian company or they aren't for sale.

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Tatneft (NYSE: TNT)

OAO Tatneft (NYSE: TNT) is a major explorer and producer of crude oil in Russia, mostly in Tatarstan, a republic of Russia situated between the Volga River and the Ural Mountains and located about 750 kilometers southeast of Moscow. At January 1, 2003, its crude oil proved reserves totalled 5.97 billion barrels.

The Company holds most of the exploration & production licenses and produces substantially all the crude oil in Tatarstan, and most of its operations are there. Export markets include both the Commonwealth Independent States and non-CIS, such as Germany, France and Poland.

Tatneft is also engaged in refining and has been developing a network of retail service stations. Refining and marketing accounted for 55 percent of 2002 revenues; exploration and production 41 pct and petrochemical 4 pct.

It also has a petrochemicals holding division centered on a tire producer, OAO Nizhnekamskshina, and provides banking services through its subsidiaries, OAO Bank Zenit and Commercial Bank Devon-Credit.

Operations are fairly efficient with gross margin very high at 50.1 pct, and net margin at 10.9. But, return on assets is a low 8.6 pct and return on equity is also below par at 13.7 pct. In addition, the margins have been falling over the past five years, which is a negative.

At today's close of $34.60, the market cap is 3.8 billion and the PE is a very low 6.44 (trailing twelve months) as per the JPM source data and 10.1 per the ADVFN data. In any event, the PE has increased quite substantially in the past year, which is also not a positive in my book.

The TNT stock still compares well in price performance against the world's best oil companies in the past six months.

Compared to LUKoil, however, Tatneft fails to measure up. But the bottom line is that it is profitable and financially solid, and worthy of investment consideration. For some people.

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Even though these two Russian oil stocks are marginally pricey (mid-March 2005), I like to say that as equity markets ebb and flow, there will be trading opportunities.

For long-term investors, LUKOY would be a very desirable holding. At every cycle low, I would add to positions.

BCara@BillCara.com

Files used:

http://finance.yahoo.com/q?s=LUKOY.PK

http://www.adr.com/adr?page=comphome&formtype=2&site=ADR&ticker=LUKOY

http://www.hoovers.com/lukoil/--ID__52426--/free-co-factsheet.xhtml

http://www.adr.com/adr?page=search§ion=financial&ticker=LUKOY

http://finance.yahoo.com/q?s=TNT&d=t

http://www.adr.com/adr?page=comphome&formtype=2&site=ADR&ticker=TNT

http://www.hoovers.com/free/search/simple/xmillion/tatneft/--ID__56568--/free-co-factsheet.xhtml

http://www.advfn.com/p.php?pid=financials&btn=s_ok&symbol=tnt&s_ok=OK&reportbug_desc=

http://www.adr.com/adr?page=search§ion=financial&ticker=TNT

http://www.investertech.com/tkchart/tkchart.asp?stkname=TNT&wt=2&ind=nn

Incidentally, I have added a special link and sort feature to the top banner GICS pages. Tonight GICS sector 10 is available. The rest will follow.

BCara@BillCara.com