JKX 1H16 revenue, EBITDA falls; cash flow improves

JKX Oil & Gas (JKX LN), a natual gas E&P with operations in Ukraine and Russia, reported a 20% yoy decline in net revenue to USD 35.4 mln in 1H16, according to its July 29 filing. The decline was mostly caused by a 30% yoy fall in revenue in Ukraine to USD 25.6 mln. The key reason for that was decreased prices for natural gas and condensate in Ukraine amid flat yoy production. In Russia, JKX posted a 26% yoy increase in revenue on the back of a 40% yoy advance in gas production.

 

The company’s total production of hydrocarbons rose 20.7% yoy to 10,393 boepd in 1H16, of which 60% was extracted by its Russian assets. The selling price of natural gas in Russia increased 6% yoy to RUR 3,637/tcm, but fell 13% yoy in the dollar equivalent to USD 1.47/Mcf. The selling price of natural gas in Ukraine fell both in the local currency (-16% yoy to UAH 5,208/tcm) and in dollars (-30% yoy to USD 5.77/Mcf).

 

The company’s EBITDA (excluding one-off items) decreased 22% yoy to USD 8.4 mln. Its operating loss (including one-off items) improved to USD 5.8 mln in 1H16, falling from USD 68.3 mln a year before. Its cash flow from operations advanced 5x yoy to USD 6.38 mln, while net CapEx slid 46% yoy to USD 1.9 mln.

 

The company’s total debt fell 36% YTD to USD 23.8 mln, consisting of bonds that are puttable in February 2017. The total amount of obligations that will be due in February is estimated by the company at USD 27.6-28.5 mln. The end-June cash balance of JKX amounted to USD 18.6 mln.

 

Excluding the debt that may become due in February, JKX reported other obligations that may become due, including USD 10.5 mln in tax debt for 2010 (the Supreme Court of Ukraine refused to hear JKX’s appeal on this issue, while the company said it will appeal to the court for the second time soon).

 

Other potential tax debt (with much less probability to become due soon) amounts to USD 23 mln. A hearing in international arbitration court – where JKX is demanding from the Ukrainian state compensation for overpaid taxes of USD 180 mln, plus other damages – started in early July and will be completed by the year end.

 

Alexander Paraschiy: Bond and tax debt payments of up to USD 39 mln that may become due in the coming seven months is the key item of concern about the company’s future. The company said it’s trying to restructure the bonds and success in this attempt will shave off most of the short-term risks.

 

A potential victory in a case against the Ukrainian government involving more than USD 180 mln creates a large value potential for the company. On the other hand, there is still little clarity on the outcome of the international court hearing (and failure could result in JKX owing USD 23 mln in taxes to the state). Even less clarity exists about the timing (and ability per se) of enforcing a possible favorable decision of the international court JKX’s favor.

 

Thus far, we are keeping a neutral position on JKX stock, still hoping that the company will be able to offer us encouraging news on its bond restructuring and also show an updated gas field development plan for Ukraine.