JKX hydrocarbon production drops 17% yoy in Ukraine in September

JKX Oil & Gas (JKX LN) produced 8,590 boepd of
hydrocarbons in September, or 11% less than August, according to its operating
update on Oct. 13. In Ukraine, it produced 3,029 boepd, which is 8% less m/m
(and 17% less yoy, based on our estimates). In Russia, it mined 5,501 boepd,
which is 4% less m/m (and 9% less yoy).

 

In 9M17, JKX’s hydrocarbon output fell 15% yoy (to
8,645 boepd), including a 20% yoy drop in Russia and 11% yoy decline in Ukraine
(to 3,595 boepd).

 

In the update, the company commented on the
development plans of its biggest Ukrainian field, Rudenivske, stating that
“significant amount of geological work is still required” to learn the
deposits. Out of the four wells worked over at the field in 1H17, the company
will produce hydrocarbons from one, will abandon two, and is still deciding on
another one. The company promises to start new well drilling in 2018 in
Ukraine, providing it’s able to secure external financing.

 

In Russia, the company reported on a delay with the
workover of Well #5, planning to complete work in late November or early
December.

 

JKX also expects “shortly” to get a court ruling from
a U.K. high court on its legal dispute with the Ukrainian government. Recall,
Ukraine appealed the court’s decision to pay JKX USD 12.1 mln.

 

Among its positive developments, JKX reported it
succeeded in cost-cutting efforts in its London offices in 3Q17.

 

Alexander Paraschiy: The decline
in JKX’s Ukraine output in September is what we anticipated, while JKX’s
Russian assets were a disappointment (we were expectingstable m/m output in September). It seems like the declining trend in both
markets will continue in October as well.

 

What’s more risky for the company’s liquidity is the
possible completion of a court hearing in London, after which the company will
have to pay about USD 25.9 mln in delayed taxes in Ukraine. In the best case,
it could be awarded compensation from the Ukrainian government in the amount of
USD 12.1 mln. In any case, that will be a significant challenge for JKX, which had
slightly more than USD 4 mln in cash as of end-June 2017.

 

The company still needs significant inflow of external
financing to remain a going concern, so we confirm our negative view on JKX
stock.