Ukrnafta Confirms Intentions to Build Gas Processing Plant

Ukrnafta (UNAF: HOLD), confirmed its plans to build a gas processing plant (GPP) with an annual capacity of 2 bcm. Vladimir Nesterenko: The plan to construct this GPP is already 2 years old. According to the release, the project did not change much, except the GPP’s location – now in Lokhvytsia (Poltava region), which implies another tender to chose a contractor. This new tender will mean construction will start not earlier than next year. We doubt that the project’s payoff period for the planned USD 200 mln investment will be only one year, as disclosed. Optimistically assuming a 20% net margin, the new GPP will have to generate USD 1 bln in revenues, which is comparable to Ukrnafta’s total revenue in 2005. In a separate release, Ukrnafta said it wants to buy a Sakhalinka license for hydrocarbon extraction for USD 59.4 mln. We do not rule out that an intensified flow of CapEx-related news has something to do with Ukrnafta management’s reluctance to pay high dividends this year. The company paid out 100% of its profits during 2004-2005 and another extreme payout will result in much higher leverage and financing costs.