Ukrnafta to Decrease Gas Extraction

According to the company release, Ukrnafta (UNAF: SELL) intends to reduce natural gas extraction, as it is unprofitable due to the low selling price set by the government. Ukrnafta’s management board asked its supervisory board (controlled by the state-owned Naftogaz) to approve a reduction in gas extraction and suspension of respective exploration work. Ukrnafta said that it will sell gas only if it is allowed to sell gas above its production cost, which is USD 69.2/tcm ex-VAT, according to management. Vladimir Nesterenko: We deem the news neutral for the stock, as we believe that the company’s threat is nothing but another attempt to push the government for a higher gas price. The announcement falls in line with our expectation that the company’s private shareholders will do their best to get the gas price cap removed or at least raised. Given Privat’s leverage, the chances still look high. However, timing matters and every delay increases the risk that 2008 average selling price will fall short our forecast (USD 97.6/tcm).