Ukrnafta To Stop Hydrocarbon Extraction From Its Western Fields

Yesterday Ukrnafta (UNAF: HOLD) announced that starting in March 2007 it is going to stop production of oil and condensate from its fields in the western Ukraine because of an increase in royalty payments in 2007. According to the press release, extraction will restart only if state authorities decrease the company’s tax burden. Vladimir Nesterenko: We doubt that a production freeze at the company’s western fields will have a substantial impact on its top line, as the incremental contribution of those fields to Ukrnafta’s total extraction volume is minor, while upstream segment revenue itself only accounts for about a half of the company’s total sales. We also suspect that the decision to stop production is related not only to the increased tax burden, but has much to do with the fact that Ukrnafta’s rigs in the western Ukraine are exhausted and require relatively high CapEx to continue operating. Given the two consecutive 100% dividend payouts in 2005-2006, the management might have decided to economize on CapEx in its upstream business, while attaching a higher priority to the development of its fuel retail segment.