JKX Oil & Gas

JKX Oil & Gas (JKX) has proven to a particularly nimble and effective operator in the Ukraine. However, in order to maintain the company's reserve base, management has actively sought opportunities further afield. In line with this diversification strategy JKX recently obtained several exploration licenses onshore in Turkey.

JKX has farmed into the Karakilise onshore exploration licenses in south-eastern Turkey. The company will earn a 30 percent interest in the permits by paying for its share of the costs already incurred on the successful Karakilise 1 well, in addition to those expended on the next appraisal well, Karakilise 2.

We believe the deal makes financial sense from a risk/reward perspective. While production at Karakilise 1 has been marginal, the potential at Karakilise 2 is significant. The well is scheduled to be drilled in the coming weeks with the goal of proving up reserves of between 10 and 20 million barrels of oil.

After Karakilise 2 is completed, drilling will move to other sites later this year. JKX plans to acquire a 2-D seismic survey to further define the area's potential. The company has also signed a Memorandum of Understanding with Aladdin Middle East Ltd, the operator at Karakilise, to potentially participate in one or more of fifteen additional licenses in Turkey.

Meanwhile we are heartened to hear the Ukrainian drilling programme has gathered pace. New wells have been drilled at the Novo-Nikolaevskoye, Molchanovskoye, and Rudenkovskoye fields. The company is continuing negotiations on further targets in Ukraine whilst progressing the evaluation of the recently acquired Elizavetovskoye license. JKX also hopes to identify suitable drilling locations in Bulgaria before the year-end.

JKX has significant leverage to rising energy prices and trades on a fairly undemanding forward earnings multiple of 12 times. The group's financial position remains extremely robust in our opinion with US$21.5 million in net cash as at the end of 2004. Future cash flow growth will be driven by energy prices which we expect will remain stubbornly high. We believe this strong liquidity will allow JKX to re-invest in future earnings growth, both in the Ukraine and elsewhere.