LONDON (Alliance News) - The new board of JKX Oil & Gas PLC Monday issued the findings of its internal review of the company as they try to clear up numerous legacy issues and put their stamp on the troubled business.
The new board said it is trying to resolve ongoing legal disputes in the Ukraine, but said legal fees are building thanks to action taken by the previous board. The new board has also claimed the old management paid themselves USD2.5 million the day before they were ousted, warning a series of one-off costs will need to be booked as a result.
JKX Oil & Gas was embroiled in a battle in 2015 with one of its major shareholders, Proxima Capital Group, which ultimately led to seven out of JKX's nine board members being ousted and replaced with nominees put forward by Proxima.
The only two directors on JKX's board that were not targeted by Proxima subsequently resigned after JKX shareholders voted in favour of the management change, meaning the entire JKX Board has been changed and downsized.
JKX is now being led by Chairman Paul Ostling and Chief Executive Thomas Reed, who are joined by Chief Financial Officer Russell Hoare. Vladimir Tatarchuk and Vladimir Rusinov make up the rest of the smaller board, taking up non-executive directorships.
Importantly, Tatarchuk is Proxima's chief executive and Rusinov is its managing director, and the new board of JKX said it plans to appoint two more non-executive directors shortly.
The new board formally took over at the end of January and have spent the last month reviewing the business before outlining its plan for the company.
"In the past month, the team and I have visited all the main assets of the group. We have identified significant scope for improvement in capital investments, and we found areas to realize both cost savings and production gains through the application of best in class technology and more hands-on execution throughout the portfolio. As we execute on these opportunities, we expect to deliver significant improvements to the value of JKX," said new CEO Reed.
JKX Oil currently produces oil, but mainly gas, from its operations in Russia and Ukraine and also has other non-producing assets in Slovakia and Hungary. Production in January averaged 10,553 barrels of oil equivalent per day compared to 8,126 barrels a day in the same month a year ago.
No additional drilling was carried out on the company's assets in 2015, with production growth coming from the restoration of Well-27 in Russia following almost two years of repair work.
"We have confirmed that all development capital expenditure ceased in 2015 due to cash constraints and unless such a program is restarted in 2016, the production levels are likely to decline during this financial year. The board is reviewing all development projects and enhancement opportunities," said JKX Monday.
Despite higher year-on-year production in January, revenue in the month fell to USD6.4 million from USD6.5 million thanks to the fall in oil and gas prices alongside unfavourable foreign exchange effects.
"We have also found several areas of legacy risk which we feel are necessary for owners to understand in more detail to properly assess their investment in this company. These risks are primarily related to production tax litigation in Ukraine, and are highlighted below in our update. We are confident in our ability to manage these risks, but we felt that shareholders should be aware of their nature and scope," said Reed.
JKX Oil is currently progressing arbitration proceedings against the government of Ukraine, claiming it has overpaid in production taxes. JKX is attempting to recover USD180.0 million in rental fees, plus damages, and said a hearing is scheduled for July this year. However, the ongoing battle will also see JKX's legal costs continue to rise.
The conflict concerning taxes in Ukraine was caused by the government's decision to increase production taxes to 55% in 2015, but an emergency arbitrator ruled that the government could not charge JKX taxes in excess of 28%. Although an international arbitration tribunal has ruled in JKX's favour, a final judgement is still required.
In tandem with its own claim against the Ukrainian government, JKX has been submerged in other legal battles in the Ukraine which also need to be settled.
"The group has several potential near-term contingent liabilities arising from three separate court proceedings over the amount of rental fees paid in Ukraine for certain periods since 2007, which in total amount to a potential liability of approximately USD41.0 million, including interest and penalties," said JKX.
"We believe that these claims are without merit under Ukrainian law and we will continue to contest them vigorously. There are several hearings scheduled in the coming months on these proceedings and we will update shareholders in due course," it added.
The relationship with Ukrainian authorities is really being tested, and the new management at JKX Oil will be keen to settle the ongoing problems as around three-quarters of its current revenue comes from the country.
Due to the ongoing litigation issues, Ukrainian officials suspended numerous permits covering JKX Oil's assets in the country, stating action needed to be taken within one month to avoid the permits being suspended.
"The authority gave a list of actions that were required in order to avoid suspension (including a change to the minimum production requirements under the licenses) and would normally have given the operator sufficient time to remedy the failings. Instead [our subsidiary] were given only one month to do so. Through further discussion with the relevant authority, [our subsidiary] has been given more time to comply and hearings regarding the status of the licenses are planned for March 2016, at which the board and [our subsidiary] is confident of a positive outcome," said JKX.
Although the new management are taking steps to remedy the company's position, it will come at a cost as JKX said it will book a series of one-off costs.
The previous management had taken legal action against two other major shareholders in the company concerning their voting rights, Eclairs Group and Glengary, which led to JKX Oil losing its attempt to block the pair from voting as the two shareholders backed Proxima's push for a management change.
Although that dispute is settled, the legal costs incurred since 2013 have mounted up to USD3.9 million, said the new board.
In addition, JKX Oil will be responsible for paying another USD3.0 million to cover the legal costs incurred by Eclairs and Glengary during that battle.
In addition, the new JKX board said it needs to book USD2.5 million of severance costs and additional remuneration which "the previous board approved and paid to themselves in the last 24 hours before the general meeting on 28 January 2016," it said.
"Management is exploring all options to mitigate these one-off costs and will keep shareholders informed as appropriate," said JKX.
"In short, we are encouraged by the physical characteristics of our reservoirs in both Russia and Ukraine, the quality of the staff across the group, the opportunity for operational and capital spending improvements, and remain committed to improving value per share to all shareholders," the company added.
JKX Oil shares were down 2.0% to 24.50 pence per share on Monday morning.
By Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance
Copyright 2016 Alliance News Limited. All Rights Reserved.