JKX to restore suspended drilling after Ukraine taxes cut

JKX Oil & Gas (JKX LN), the natural gas producer operational in Ukraine and Russia, is going to reinstate previously suspended drilling programs in Ukraine, the company reported in a Jan. 7 press release, providing little details. The plans are prompted by the parliament’s approval of reduced gas production tax rate in Ukraine (to 29% of the market price as of 2016, from 55% previously). The tax cut does not affect JKX’s plans to sue the Ukrainian government for USD 270 mln in damages incurred by higher tax rates imposed by parliament in August 2014.

That 55% production tax rate for natural gas was introduced as an interim measure, but was then unexpectedly extended for 2015. Ukraine pledged to the IMF to lower the rate in mid-2015, effective for 4Q15, but managed to do it only in late December.

Alexander Paraschiy: A possible resumption in JKX’s drilling program in Ukraine seems to have been priced in by the market. The company many times referred to increased taxes when justifying its radical reduction in capital expenditures in Ukraine. At the same time, we see some potential for a positive market reaction to JKX’s new drilling program, once more details on it are announced.

JKX’s stoppage of active well operations in Ukraine already led to a 14% yoy reduction in JKX’s natural gas production in 11M15, and we expect the decline will extend into the coming months. At the same time, we see a high chance that some recovery in JKX’s gas output will start in the second half of 2016.