Lukoil Looks Abroad

• Email
• Share
• Print

In 1984 teens-with-guns flick Red Dawn, Soviet-bloc infantry invade the U.S. in a surprise attack, followed shortly thereafter by armored reinforcements. It appears that we are now seeing this "history" repeat itself in the business world.

In Nov. 2000, Russian oil behemoth Lukoil amazed (and bemused) U.S. investors when it announced that it would be acquiring Getty Petroleum Marketing and its 1,300 U.S. gas stations for $71 million, the first acquisition of a U.S. public company by a Russian buyer in recent memory.

"What does Russia's second-largest oil producer want with a third-rate U.S. retail gasoline chain?" industry analysts asked. To which Lukoil responded with the doubtful prediction, ''We consider this a springboard to further acquisitions in the U.S."

That prediction looks less doubtful, however, after a statement released by Lukoil along with its third-quarter 2003 earnings announcement earlier this week. Citing Russia's two-tier energy pricing structure as a drag on earnings (Russian consumers pay as little as one-eighth the market price for Russian oil and gas), Lukoil said that this year it intends to sell as little of its oil domestically as possible.

Now, if you're not going to sell your oil domestically, there's only one place left to sell it: internationally. In that case, a U.S. retail gasoline station chain comes in mighty handy, with the U.S. accounting for 40% of the world's gasoline consumption.

As for "further acquisitions," it seems unlikely that even a company as large as Lukoil would seriously entertain hopes of acquiring U.S. competitors ExxonMobil (NYSE: XOM) or ChevronTexaco (NYSE: CVX). The former is more than 10 times Lukoil's size; the latter, at least four times as big. However, there is one major U.S. chain in respect to which situations are reversed. Amerada Hess (NYSE: AHC) is only one quarter the size of Lukoil.

Whether or not Lukoil makes another U.S. purchase, its decision to refocus sales internationally seems prudent in light of the ongoing dispute between Russia and the European Union over Russia's entry into the World Trade Organization. The EU insists that Russia charge market rates for energy sold domestically. Russia objects to the requirement, in part because it fears voters' reaction to increased heating bills. By phasing out domestic sales, Lukoil ensures that whichever way the issue is decided, Lukoil shareholders will not be affected.

Rich Smith 's day job is advising companies on doing business in Russia. He has bought gasoline at all of the companies mentioned in this article, but owns shares in none of them. The Fool has a disclosure policy .