JKX oil & gas output rises 21% in 5M16 amid reduced overhead costs

JKX Oil &Gas (JKX LN), a natural gas E&P operational in Ukraine and Russia, released set of encouraging figures on June 20, ahead of its AGM on June 28. In particular, it reported a 21% yoy increase in hydrocarbons output to 10,322 boepd in 5M16. The growth was fueled by a 41% yoy increase in output in Russia, where the company commissioned a fourth well in late 2015. Production of natural gas in Ukraine was flat yoy. The devaluation of local currencies, and declining commodity prices, resulted in about an 18% yoy fall in JKX’s revenue in 5M16, it reported.

The new management also reported it’s working on optimizing its overhead costs in its London office, which was eating away more than 10% of the company’s revenue generated in recent years. In particular, JKX reduced its London headcount by 45% and is moving the staff from four office floors to one. JKX also partially repurchased its bonds for USD 2.2 mln, which will reduce its total debt repayable in February 2017 to USD 27.6 mln, from USD 30.1 mln.

JKX also reported on some progress in its tax litigation with the Ukrainian government. It won a court battle in Ukraine’s Supreme Court over USD 6 mln in tax obligations; and lost a battle over USD 11 mln in tax, now preparing a final appeal to the Supreme Court. The company also gained a ruling from the international arbitration court that reaffirms its previous decision to limit JKX’s production tax in Ukraine to 28% (last year, the production tax was 55%, and Ukrainian tax authorities claim JKX has to pay an additional USD 24 bln in taxes and penalties for 2015). JKX confirmed its expectations that the international arbitration court will hear its claims against the government in July 2016. Earlier, JKX reported that it may claim compensation of about USD 180 mln from the government.

Alexander Paraschiy: The optimization of its U.K.-related costs seems to be the main achievement of JKX’s new management team, thus far. Improved production performance in Russia is of little surprise, while stable yoy gas output in Ukraine is only the result of a low comparison base. JKX showed record-low production in Ukraine in January 2015 due to unfriendly moves by the government. Among the key short-term challenges for JKX remains the USD 30 mln debt that is due on February 2017, which the company currently has no funds to prepay.

At the same time, it looks like the company’s future will largely depend not on its operations in Ukraine or Russia, but on the results of upcoming court litigations against Ukraine. Out of a potential tax obligation totaling USD 41 mln, the company seems to have won court battle for USD 6 mln, with USD 35 mln still under risk. Potentially, the company could win its big battle for about USD 180 mln in international court, which could become its main value driver.