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Ukrnafta EGM takes first step to resolve its tax debt issue

Ukrnafta EGM takes first step to resolve its tax debt issue

29 March 2019

Shareholders of Ukraine’s biggest crude oil producer
Ukrnafta (UNAF UK) decided to allow the company’s management to sell 4.06 bcm
of natural gas to its key shareholder, Naftogaz (50%+1 share), the company
reported on March 28. Out of this amount, 2.06 bcm is natural gas “that has
been pumped into underground storage” (this gas was supplied by Naftogaz to
residential consumers 10-12 years ago, while Naftogaz did not pay Ukrnafta for
it) and 2.0 bcm is the gas to be produced in the future. Proceeds from the sale
of all gas will be directed exclusively to repay Ukrnafta’s debt on taxes and
related penalties, the company reported.

 

Earlier, Naftogaz CEO Andriy Kobolev estimated the
total debt of Ukrnafta to the tax administration (including penalties) at over
UAH 32 bln (USD 1.2 bln). As a source of funds to purchase gas from Ukrnafta,
Naftogaz is expecting to receive respective compensation from the government
for losses incurred by Naftogaz owing to inefficient gas prices set by the
Cabinet for certain consumers.

 

Also, Ukrnafta shareholders voted to replace the
company’s CEO and supervisory board, as well as change the company’s statute to
empower the supervisory board to appoint and dismiss the CEO.

 

Alexander Paraschiy: If the
Cabinet allows Naftogaz to purchase gas from Ukrnafta, that should be
beneficial for the oil company (which will recover its solvency and will get a
chance to develop its business, but is likely to pay an additional profit tax
on the deal), slightly positive for future state budget revenue and slightly
negative for Naftogaz’s cash flow. For the budget, the transaction will be
cash-positive in 2019 and 2020. (If the state provides the compensation to
Naftogaz, this amount will be recognized as Naftogaz’s profit, from which the
company will pay tax this year and dividends next year; the state may also
receive tax and dividends from Ukrnafta’s profit on the deal). For Naftogaz,
the deal will be cash-negative due to the likely obligation to pay higher
dividends, but it will resolve the old claim of Ukrnafta that Naftogaz
“expropriated” its gas. 

 

In any case, now the success of the deal will
depend on the will of the Cabinet to do such a transaction. So far, the Cabinet
does not look inclined to allow it. In particular, the Cabinet issued a decree
on March 27 calling upon Naftogaz management to avoid doing any deals with its
subsidiaries before Naftogaz’s financial plan is approved by Cabinet.

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