29 Feb 2016 07:00
29 February 2016
JKX Oil & Gas plc ("JKX", the "Company" or the "Group")
Operational Update
JKX, an upstream oil and gas exploration and production company with significant assets in Ukraine and southern Russia, provides an operational update to investors following the change in management that took place on 28 January this year.
Introduction
At a requisitioned General Meeting of the Company held on 28 January 2016 an overwhelming majority of the Company's shareholders voted to replace the previous board of directors with a new Board. The new Board promised a greater level of transparency and engagement with shareholders and other stakeholders and, with this in mind, has conducted preliminary on-site reviews of the operations of JKX. Now, 30 days after its appointment, the Board sets out below the major findings of those reviews.
Tom Reed, JKX's new CEO, said, "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.
"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.
"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."
Production
In January 2016, the Company produced 10,553 boepd of which 9,863 boepd was gas. 6,581 boepd was produced in Russia and the remainder in Ukraine. This compares with January 2015 production of 8,126 boepd of which 7,284 boepd was gas. Since there was no additional drilling in 2015, production growth came primarily from the restoration of production from well-27 in Russia, following almost 2 years of repairs. There is currently no production from the Hungarian assets. We have confirmed that all development capex 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.
Revenue
In January 2016, Company revenue (unaudited) was $6.4 million of which $4.8 million was from oil, gas, condensate and LPG sales in Ukraine and $1.6 million from gas and condensate sales in Russia. Revenue in January 2015 was $6.5 million ($5.0 million in Ukraine and $1.5 million in Russia). The slight reduction in revenues is primarily due to the weakening of local currencies and the decline in oil and gas prices, in line with international market trends, partly offset by higher volumes. Gas realisation per unit in Ukraine in January 2016 was 3.7 times higher than in Russia.
Convertible debt
The Company's main financial instrument is a $40 million convertible bond which was placed in 2013 with institutional investors. The bond pays an annual coupon of 8% payable semi-annually in arrears and matures in 2018 however bondholders have certain rights to early redemption of the bonds, as further described in the 2014 Annual Report.
The scheduled repayment to bondholders due this month of $12.3 million was made on time and in full from cash balances on hand. If all bondholders exercise their option to early redemption in February 2017, as they are entitled to under the terms of the bonds, the Company will owe bondholders a further $30.1 million at that time (consisting of $26 million principal, $1 million interest and a redemption premium of $3.1 million).
Ukrainian production tax litigation
The Hague Arbitration
The Company commenced arbitration proceedings against Ukraine under the Energy Charter Treaty, and the investment treaties between Ukraine and the United Kingdom and the Netherlands respectively on the basis of overpayment of production taxes ("rental fees"). During 2015 production tax rates in Ukraine were increased to 55% and capital control restrictions were introduced. On 14 January 2015, an Emergency Arbitrator issued an award ordering Ukraine to cease imposing rental fees in excess of 28% on gas produced by the Company's Ukrainian subsidiary, Poltava Petroleum Company ("PPC"), pending the outcome of the application to a full tribunal for the Interim Award. On 23 July 2015 an international arbitration tribunal issued an Interim Award requiring the Government of Ukraine to limit the collection of rental fees on gas produced by PPC to a rate of 28%.
The Interim Award was to remain in effect until final judgement is rendered on the main case (relating to the overpayment of approximately $180 million in rental fees, plus damages to the business). The arbitration hearing is expected to take place in July 2016 and will result in additional legal costs for JKX.
Ukrainian Legal Cases
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 $41 million, including interest and penalties. 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.
Ukrainian production licenses
Following action initiated in late 2015, in January 2016, the State Geology and Mineral Resources Survey of Ukraine suspended four of PPC's subsoil use permits, initially with effect from 1 February 2016, but then with an extension period until 1 March 2016. 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 PPC were given only one month to do so. Through further discussion with the relevant authority, PPC 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 PPC is confident of a positive outcome. We will make an announcement as soon as we have clarity on this issue.
Overheads and one-off costs
Going forward, we intend to clearly separate significant and non-recurring administrative costs from the Company's operating costs. Using this approach, other significant costs that the Company has incurred related to past, non-operating events include:
• Approximately $3.9 million of legal costs incurred by the Company from 2013 to date in connection with the restrictions imposed on the exercise of voting and other rights of two major shareholders, Eclairs and Glengary, in 2013 and again in January 2016;
• As a result of the Supreme Court of the United Kingdom finding against the Company an additional $3 million (approximate amount including interest) of legal costs incurred by Eclairs and Glengary in successfully challenging the restrictions imposed;
• Approximately $3.5 million in legal fees incurred to date in respect of the international arbitration proceedings (see above); and
• Approximately $2.5 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.
Management is exploring all options to mitigate these one-off costs and will keep shareholders informed as appropriate.
Looking ahead
There are many challenges facing the Company, not all of them easily understood from previous communication. We are making this announcement in the spirit of a new and transparent approach to actively engage all shareholders and other stakeholders of the Company, as we stated we would prior to the recent General Meeting. We have had 30 days to review operations and accounts within the Company, and are presenting our findings in the form of this operational update.
We are in the process of appointing two independent non-executive directors and hope to make announcements on this in the near future.
The Company's Final Results for the year ended 31 December 2015 will be announced on 21 March 2016.
ENDS
For further information please contact EM:
Stuart Leasor
leasor@em-comms.com
T: +44 20 3709 5711
M: +44 7703 537721
Jeroen van de Crommenacker
crommenacker@em-comms.com
T: +44 20 3709 5713
M: +44 7887 946719
This announcement may contain statements that are, or may be deemed to be, forward-looking statements. Any such forward-looking statements are based on the Company's current expectations and are, by their nature, subject to a number of risks and uncertainties that could cause the Company's actual results and performance to differ materially from any expected future results or performance expressed or implied by such forward-looking statements. Forward looking statements should, therefore, be construed in light of such risk factors and undue reliance should not be placed on them. Some of the most important risks in this regard are described in the 2014 JKX Annual Report. Forward-looking statements speak only as of the date of this announcement and, save where required by applicable law or regulation, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Certain information included in this announcement is based on management estimates. Such estimates have been made in good faith and represent the current beliefs of the Company's management. The Company's management believes that such estimates are founded on reasonable grounds. However, by their nature, estimates may not be correct or complete. Accordingly, no representation or warranty (express or implied) is given that such estimates are correct or complete.