The agency also affirmed the company's Russia National Scale Rating at 'ruAA'.
"The CreditWatch placement reflects the possibility of an upgrade, most likely by one notch, in the coming months," Standard & Poor's credit analyst Karl Neitvelt said.
"We will also seek further comfort on expected improvements in free cash flow generation, as the group recently announced a $3 billion share buyback program," he said.
"Any upgrade will depend on Standard & Poor's assessment of management's stance toward future M&As, and its financial debt management and policy targets, notably the possibility of future debt increases, given the company's maximum 30% leverage level. The current level is well below that, at 11% at end-September 2005," the agency said.
"For LUKoil, we do not view country risk to be the key hurdle for ultimately achieving investment-grade ratings, bearing in mind its long-established track record (including absence of material back tax claims), its asset diversity, and its largely Russian ownership, as a result of which it is, for instance, qualified to bid for strategic domestic fields. That said, Russian state-owned competitors, such as OAO Gazprom (BB+/Positive/--), or OJSC Oil Company Rosneft (B+/Positive/--), are likely to be in preferential positions," the agency said.
Standard & Poor's said it intended to resolve the CreditWatch status by the end of June after meeting with LUKoil management.
