Serinus Energy production falls 28% yoy in 3Q15

International oil & natural gas production company Serinus Energy (SEN PW) produced 4,078 boepd of hydrocarbons in 3Q15, a 2.1% qoq increase but a 28% yoy decrease, based on its quarterly update released on Oct. 19. The decline was mostly caused by a drop in its Ukrainian operations by -39% yoy and -1.9% qoq to 2,735 boepd. Its production in Tunisia increased 11.4% qoq and 14.8% yoy to 1,343 boepd. From Oct. 1 to reporting date, its production declined from average 3Q15 levels on both markets, including -2% in Ukraine and -17% in Tunisia, the company reported.

The company’s average realized hydrocarbon price decreased on both markets due to a negative global oil trend. In Tunisia, average price fell 39% yoy (and 6% qoq) to USD 58.1/boe, while in Ukraine the price declined 36% yoy (and 8% qoq) to USD 39.5/boe, we estimate. The company updated the public on its development program in Ukraine, commenting it has completed drilling a new M-22 well.

Serinus also offered an update on the situation with Ukrainian tax legislation, reporting that parliament has approved in the first reading a bill stipulating a decrease in the natural gas subsoil tax rate from 55% to 29%. It also reported that the effective tax burden for Serinus’s gas operations in Ukraine was higher than 55% of achieved price (63.9% in 2Q15, while no data was disclosed for 3Q15) as its price was smaller than the regulatory price benchmark. Ukrainian natural gas sales brought two-thirds of Serinus Energy’s gross revenue in 3Q15 (and three-quarters in 3Q14), based on our estimates.

Alexander Paraschiy: Serinus’s financial results will most likely reach their three-year low in 3Q15 and will bottom out in 4Q. The key drivers of the poor expected 3Q P&L data are high gas taxation in Ukraine, the related decrease in the company’s Ukraine operations and low commodity prices. In particular, in 3Q15, we estimate the company’s gross revenue will amount to USD 21.4 mln (-54% yoy and -4% qoq) while its revenue net of royalties will amount to USD 12.0 mln (-60% yoy and -5% qoq).

A key driver for the recovery of Serinus’s financials, hopefully effective some time in 4Q15, will be a reduction in Ukraine’s natural gas production tax. We expect it will be cut from 55% of the benchmark gas price (which is non-existing in Ukraine since Oct. 1) to 29% of the price of imported gas. This will lead to a 2.3x decline in tax per unit of natural gas produced, from roughly USD 4.7/Mcf in 3Q15 to USD 2.1/Mcf in late 4Q15. There is a high chance that the respective law will be approved by Ukraine’s Verkhovna Rada in the coming month. Recall, a revision of the natural gas taxation policy was one of the commitments that the Ukrainian government took before the IMF for its four-year, USD 17.5 bln loan program.