JKX Oil & Gas
06/23/2006
JKX Oil & Gas (JKX) followed up a robust full year results announcement in March with an encouraging drilling update last month. We remain steadfast of the view that the ongoing development of the Poltava licences will be integral to the company's long-term success. Whilst oil prices have been volatile of late, we remain confident of a long-term bull market in energy. We expect JKX to flourish in such an environment.
The Ukraine remains the focal point of production and investment for JKX. The drilling programme at the Poltava licences is now accelerating following the addition of a second drilling rig at the start of the year. In May, JKX reported positive drilling results and the completion of two further development wells on the Ignatovskoye and Molchanovskoye fields respectively. As a result current production rates have risen above 12,000 barrels of oil equivalent per day.
We took great encouragement from the Chairman's comments from the recent AGM. He reaffirmed this year's objectives are to lift production, whilst using a robust balance sheet and strong cash flows to pursue additions to the reserve base. Open license auctions recently introduced in the Ukraine should facilitate this outcome.
Last year JKX expanded its horizons to Turkey and Bulgaria, and it seems further geographical diversification is on the agenda. Specifically management are evaluating onshore opportunities in Russia.
Expanding abroad will offer more balance to earnings, however we believe the Ukrainian region will continue to offer the greatest potential. There is currently some political uncertainty however with no governing coalition since March's election. Once this is resolved, further privatisation of the local oil and gas sector will likely boost JKX's position in the region.
We are expecting further earnings out-performance from JKX. Exploration and development is ramping up, and will likely translate into further production and reserve upgrades. We expect JKX will not only benefit from a reassertion of the uptrend in energy prices globally, but also from higher localised gas prices in the Ukraine on the back of market liberalisation there.
The company's valuation is undemanding with a forward price earnings multiple of just 13 times. With our long term forecast for oil to push above US$100, we believe that JKX retains the potential for additional gains. The prospect of further corporate activity may also spur a re-rating. This week it was revealed that Glengary Overseas Limited (an entity acting for an as yet to be identified Russian investor) has increased its stake from 16.17% to 25.88%.
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