JKX loses litigation against tax authority for USD 14 mln

JKX Oil & Gas (JKX LN) reported on April 28 that
its Ukrainian subsidiary received a final judgment from the Supreme Court in
favor of the tax authority related to tax claims for 2010. To this end, the
company is obliged to pay USD 14.1 mln to the tax authority. According to the
report, the company “is under no immediate obligation to pay the judgement” as
another hearing that could allow the authorities to collect the payment “is
expected to be heard in late 2022.”

In its recent annual report, JKX stated that the
hearing on this case was successful for the company in June 2017, when the
Kharkiv Appellate Court upheld the judgement of a lower court in favor of the
JKX subsidiary. At the same time, the company has maintained provisions for
payment under such litigation.

Alexander Paraschiy: From the
court ruling database, we learned that the Supreme Court cancelled the 2017
rulings of the first-tier and appellate courts that were made in favor of JKX.
In this way, the court reinstated the rulings of the first-tier and appellate
courts made in 2014, which were not in favor of JKX.

The news is a negative surprise for JKX, which is
now very likely to pay USD 14.1 mln to the Ukrainian tax authorities, whereas
from the company’s reports it did not look that the probability of such an
outcome is high. The good news is that JKX has enough resources to pay the bill
(USD 28.4 mln in net cash as of end-March), so the potential payment won’t dry
up the company’s liquidity. At the same time, the need to pay (even in a 1-2
year perspective) significantly restricts the company’s ability to invest into
new E&P, which, coupled with high decline rates of hydrocarbon output in Ukraine observed over the last quarters, limits
its value growth potential in the mid-term.