JKX EBITDA surges 60% in 2017

JKX Oil & Gas (JKX LN) reported a 4% yoy increase
in net revenue to USD 76.44 mln in 2017 owing to higher average achieved oil
and gas prices, which offset a production decline of 14% yoy to 8,658 boepd.
The company’s EBITDA before exceptional items amounted to USD 25.28 mln, or 60%
higher yoy. Ukrainian assets were traditionally the key value generator for
JKX, contributing 75% to its revenue and 95% to EBITDA.

The company’s operating losses after exceptional items
dropped 62% yoy to USD 13.23 mln and net losses slid 52% yoy to USD 17.66 mln.

Its operating cash flow before working capital changes
jumped 66% yoy to USD 23.14 mln, while a working capital increase resulted in a
25% yoy decline in net cash flow from operations to USD 11.03 mln in 2017. The
company’s CapEx jumped 2.2x yoy to USD 16.7 mln mostly as a result of
investments into the exploration of the Ukraine-based Rudenkivske field, which
brought little positive results. In 2018, JKX is planning to spend more
carefully on CapEx, concentrating on “proven low risk technologies.” Namely,
this year JKX is going to drill one new well in Ukraine, as well as do four
sidetracks and 12 workovers at the existing wells. In Russia, the company is
going to sidetrack one well.

JKX’s end-2017 unrestricted cash stood at USD 6.93
mln, which is 51% less yoy but 72% more than as of mid-2017. Its net debt
jumped 3.6x yoy to USD 9.20 mln. Out of its total debt of USD 16.63 mln as of
end-2017, the company has repaid USD 6.9 mln in February 2018 and will have to
repay USD 0.8 mln in August. At the same time, the company has an undrawn
credit line for about USD 5.3 mln.

The company also has USD 25.8 mln in potential tax payables
in Ukraine for the year 2015 and is due to receive from the Ukrainian
government USD 12.1 mln in compensation, both of which are currently being
appealed in the courts. On top of that, Ukraine tax authorities claim that JKX
should pay USD 11.3 mln for the year 2010, while JKX has won appeals cases
against this claim.

Alexander Paraschiy: The key
positive development is that JKX was able to partially resolve its liquidity
problem that surfaced in mid-2017. Its unsuccessful experience with Rudenkivske
cooled its appetite for investing into “new technologies” and exhausted its
liquidity, forcing the company to concentrate on cost-cutting projects and
investment into proven and well-studied fields. Such tactics should pay off and
improve the company’s P&L in 2018.

The company’s 2017 P&L looks strong and should
be supportive for its stock price in the short term. However, as before, the
unresolved debt issue for the year 2015 is the key factor preventing us from making
a positive investment recommendation for JKX stock.