Ukrnafta Increased Oil & Gas Production By 2.2% and 1.8% Respectively

According to the company’s reported operating results, in 2006 Ukrnafta (UNAF: HOLD) increased oil and condensate production by 2.2%, while production of gas grew by 1.8%, thus lagging behind our projections. Production of gas liquids substantially outpaced our forecast, having increased by 12.7% yoy. The company only put into operation 43 new oil & gas rigs, compared to 59 new rigs last year.  Drilling volumes decreased by 6.4%, to 151 ths m. Vladimir Nesterenko: We think that Ukrnafta’s lower than expected extraction volumes can be explained by its insufficient reserves recovery rate, which may stem from limited availability of new fields. Recovery rate and drilling volume is also likely to suffer from a deficit in operating funds caused by UNAF’s abnormal 100% dividend payout in 2005-2006 and substantial increase in tax burden in the form of higher royalties.

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                                               2005      2006   change, yoy

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Oil & condensate, mln bbl            23.1      23.6          2.2%

Natural and oil gas, mln boe         20.4      20.8          1.8%

Liquefied gas, mln boe                 1.4       1.6             14.7%

Stable gasoline, mln boe              1.9       2.1            11.1%

New oil rigs                                 59        43            -27.1%

Drilling volume, ths m                161.5     151.1         -6.4%

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