Fat Prophets
21 July 2010
JKX Oil & Gas
Drilling success
With results from a second well test in the Koshekhablskoye Field in Russia "far" exceeding expectations, the recent uplift in JKX’s share price may seem to have an explanation. However the recent recovery can best be attributed to the deep selling witnessed in its sector because of fears that the prices for oil and gas would fall in the event of a double dip recession, the likelihood of which is receding by the day.
JKX has some of the best margins in the business with a strong management team focussed on regional exploration. The only criticism sometimes levelled at the company is that its reserve position is low. This is not uncommon for junior petroleum companies and JKX is working hard to increase production through exploration and technical success. The company’s specific focus is to develop gas fields in Ukraine and Russia.
Exploration is the lifeblood of JKX. The current exploration program includes three deep wells planned for the challenging Rudenkovskoye field, Ukraine. At the end of May the first of these wells was underway.
The first 1,000 metre horizontal section of the first well was scheduled for completion and testing in July, prior to any fraccing program. The company contracted a second drill rig to maintain an active development program that investors are not being regularly updated on.
We expect market speculation on the success of the horizontal development wells. The sword cuts both ways and failure will result in a retracement of the JKX’s share price.
JKX’s wholly owned subsidiary the Poltava Petroleum Company (PPC) is the largest non-state gas producer in the Ukraine. Oil and gas is produced fields located in the Poltava region. PPC commenced commercial production of oil and gas in 1995.
PPC’s reserve situation in the Ukraine could do with a boost. Reserves at the start of 2009 were 9.1 million barrels of liquids and 225.8 Bcf (billion cubic feet) of gas. Production during the year was 1.5 million barrels of liquids and 16.1 Bcf of gas.
There were no additions to reserves during the period. It would appear that subject to technical matters that gas reserves are sufficient for over 10 years at the 2009 level of production, whilst oil reserves will be depleted during 2015.
JKX has had better luck adding to reserves in Russia where it has reserves of 0.3 million barrels of oil and 267 Bcf of gas. Reserves in Hungry were minimal at the end of 2009 with 0.2 million barrels of oil and 7.0 Bcf of gas.
JKX needs to book additional reserves otherwise the valuation of the company will fall. Hopefully the three horizontal wells at Rudenkovskoye will be successful and allow the company lift its reserve base. The market seems to be betting that this will be the case.
JKX has a rising production and revenue profile from 2010 to 2014. Over this period there is a modest rise in net profit before extraordinary items and the price earnings multiples fall from 7 times in 2010 to 5 times in 2014. The cash flow multiples are low at 4-5 times; but unless the company increases its reserves the company will continue to trade on low earnings multiples.
Article produced by Senior Research Analyst, Aamer Nawid.
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