Serinus Energy reports expectedly weak financials in 3Q15

Serinus Energy (SEN PW), an oil and natural gas company operating in Ukraine and Tunisia, reported a 45% yoy drop in gross net revenue to USD 67.9 mln in 9M15, according to its Nov. 13 filing. Its Ukraine gross revenue declined 47% yoy to 46.8 mln. Its revenue net of royalties fell 58% yoy to USD 39.9 mln, caused by a 67% yoy plunge in its net revenue in Ukraine.

Serinus reported USD 44.3 mln in impairment losses related to its Tunisian assets, which resulted in an operating loss of USD 40.2 mln in 9M15. Net of the impairment, the company generated operating profit of USD 4.1 mln (down 89% yoy). Ukraine remained Serinus’s key profit-generating segment, bringing USD 7.1 mln in operating profit in 9M15, an 81% yoy decline mostly caused by a higher taxation regime since August 2014. Serinus’s net loss amounted to USD 33.1 mln in 9M15 (compared to a USD 18.0 mln profit a year before).

In 3Q15 alone, Serinus generated a gross revenue of USD 20.5 mln (-56% yoy), net revenue of USD 12.9 mln (-57% yoy) and operating profit (net of assets impairment) of USD 1.7 mln (-85% yoy).

The company also reported it breached a debt covenant on an EBRD loan, having an insufficient debt service coverage ratio as of end-September. The breach had forced it to reclassify all its long-term debt to short-term, which resulted in a formal increase in its working capital deficit of about USD 50 mln. It also reported it was able to waive the covenant. Serinus’s total debt stood at USD 53.4 mln as of end-9M15, a 43% YTD rise.

Alexander Paraschiy: The company’s 3Q15 P&L is broadly in line with what we expected (gross sales of USD 21.4 mln, net sales of USD 12.0 mln). It’s also not a surprise that 3Q15 was the weakest quarter for the company in the last four years.

We continue to anticipate that the next quarter will be much better for Serinus, mostly due to an expected decrease in natural gas production taxes in Ukraine. We expect Ukraine’s parliament will be able to find a political compromise and adopt the necessary changes to the tax code in the last week of November. If not in November, we are sure that parliament will adopt a tax reduction bill by the year end, as it remains among the key commitments of the Ukrainian government to the IMF.

The expected tax cut will significantly improve Serinus’s solvency and liquidity already in 4Q15. Should Ukraine charge royalties based on the drafted legislation (29% tax of the gas export price, instead of 55% of the regulated price), Serinus would have generated additional profit of USD 7.6 mln in 9M15. This would have boosted its operating profit (net of assets impairment) 2.9 times and operating cash flow before working capital changes 1.7 times in 9M15.