JKX repurchases USD 6.4 mln of debt

JKX Oil & Gas (JKX LN), a company operational in Ukraine and Russia, reported on Oct. 19 it has recently repurchased USD 6.4 mln of the principal amount of its convertible notes at an average price of 94% of par. With the purchase, the company decreases its total payment of interest and principal (due in February) by USD 7.3 mln. Together with September’s repurchase of USD 1.4 mln, JKX has reduced the value of notes outstanding by 33% compared to end-1H16 to USD 16.0 mln. JKX may make further repurchases and “also continues to explore various options for restructuring the remaining bonds,” it reported.

Alexander Paraschiy: The company’s end-June cash balance of USD 18.6 mln allows it to repay a significant part of its debt, which stood at USD 23.8 mln as of end-June.

Theoretically, it would be able to repay the debt in full (all of it matures in February) by using all its cash and generating USD 7-8 mln in free cash flow in July – February, which is realistic. However, we do not believe the company will do it, primarily because it could have other significant payment obligations. In particular, it has lost a court battle with the Ukrainian government, which demands that the company has to pay USD 10.5 mln in tax arrears for 2010. Thus far, JKX’s chances of appealing the unfavorable decision of the High Administrative Court look very low, and so are the company’s ability to postpone the obligation’s payment.

On the other hand, the company might count on a positive decision of international arbitration against the Ukrainian government, which may rule by the end of this year that Ukraine should compensate over USD 180 mln to JKX. In case of the company’s victory in this battle (which will increase the chance that JKX receives any compensation, sooner or later) it will become very easy to restructure any outstanding debt. Thus far, we confirm our position that JKX is a story that should be closely monitored, as it has both large upside potential and high risk.