JKX reports on latest police searches of Ukraine offices

Ukrainian police carried out an unannounced search of the Kyiv office of JKX Oil & Gas (JKX LN) on Jan. 24, the company reported the next day. That followed searches of the company’s offices in Poltava on Jan. 11 and in June last year, the company said in a statement. “It is increasingly taking on the form of harassment rather than a legitimate investigation,” the company said, adding that it “continues to cooperate with the inquiry and has been providing all materials requested in the search warrants in a full and timely manner.”

Recall, in June 2016, JKX reported on the first police visit to its offices and homes of two senior employees. At that time, the company attributed the searches to “investigations of claims of alleged underpaid taxes,” claiming such moves were “completely unjustified”.

As of beginning 2016, JKX had tax claims from the Ukrainian government totaling USD 40.9 mln, of which USD 10.9 mln were claims from 2015. That year, the company decided to pay a natural gas production tax based on a tax rate of 28% (despite the rate of 55% that was applied in Ukraine then), as such an option was allegedly granted to the company by international arbitration.

Alexander Paraschiy: As we understand it, the police actions are related to a case of underpaid taxes by JKX in 2015. JKX is not the only natural gas producing company that suffers from the pressure of law enforcement bodies. Tax investigations also involved Burisma, a firm belonging to ex-Ecology Minister Mykola Zlochevskiy. (The company was able to settle the issues in January). Another tax evasion investigation in the natural gas business targeted Oleksandr Onyschenko, who was stripped of his parliamentary immunity and left the country last year.

The pressure on JKX won’t harm the company’s Ukrainian operations, in our view. But it can affect management decisions to increase investments in the exploration of production of its Ukrainian fields. Regardless, the main possible price driver for JKX this year could be the results of its international arbitration case, in which it’s demanding the Ukrainian government to compensate the company for more than USD 180 mln in past losses.