JKX decreases oil & gas output 15%, posts USD 13.8 mln loss in 1H15

Hydrocarbon output at JKX Oil & Gas (JKX LN) dropped 15% yoy to 8,611 boepd in 1H15, according to its interim report released on July 29. The decline was driven by declining production in both Ukraine (-16% yoy to 4,140 boepd) and Russia (-14%). The company attributed Ukraine’s output decrease to increased subsoil taxation and related stoppage of most of well operations. In Russia, JKX’s output was affected by the idling of two wells that the company is trying to repair. In 2H15, the company expects to produce over 8,000 boepd of hydrocarbons. The company said it will restart its CapEx in Ukraine only when “the investment conditions improve and the currency restrictions are lifted”.

As before, natural gas was JKX’s biggest product, accounting for 90% of total output. The average achieved price of natural gas fell 21% in 1H15, mainly due to devaluation of local currencies against the U.S. dollar. Prices fell 36% yoy in Russia and 16% yoy in Ukraine. As a result, JKX posted a 40% yoy plunge in net revenue to USD 44.4 mln in 1H15.

The company’s operating profit fell to negative USD 7.26 mln in 1H15 (compared to positive USD 2.41 mln a year before). Ukraine remained the company’s only profitable segment, but operating profit plummeted here 90% yoy to USD 1.55 mln. This was mainly a result of the gas production tax hike in Ukraine to 55% in 1H15 from about 28% a year ago, as well as a scale effect.

JKX’s bottom line was negative at USD -13.8 mln in 1H15, compared to a positive result of USD 8.5 mln in 1H14. The company’s CapEx slid 80% yoy to USD 4.2 mln in 1H15, mainly due to a plunge in Ukrainian investments by 10x yoy to USD 1.7 mln. Its net debt increased just USD 2.6 YTD in 1H15 and amounted to USD 10.4 mln as of the period’s end.

The company also updated on its reserve base, having reported 2P reserves at 97.7 mln boe as of end-2014 (+3.5 mln boe yoy). The increase is attributed to an upward revision of Russian reserves by a total of 9.5 mln boe. Its Ukrainian 2P reserves dropped 4.2 mln boe yoy to 28.9 mln boe, due to both reserve use and their downward revision.

Alexander Paraschiy: There is little surprise in JKX’s weak P&L for 1H15, which was probably the toughest period in the company’s history. The second half of the year should be better in terms of profitability, we expect, due to some upgrade in gas prices in Russia since July and an expected halving of Ukraine’s production tax starting October. On top of that, we expect no more market limitations on the sale of JKX’s natural gas to Ukrainian consumers (valid during the last winter) as the newly adopted law on the gas market prohibits such practices.

Despite expected improvements in operating margin in 2H15, we see the company’s hydrocarbon output will decline further in the coming months, due to its insufficient efforts to maintain natural gas output on its Ukrainian assets. On top of that, we remain skeptical on the validity of JKX’s reserve base, especially at its Rudenkovskoye license in Ukraine (reportedly holding 71% of its total Ukrainian reserves). All in all, we remain neutral on the prospects of JKX stock.