JKX Oil & Gas

Up until recently JKX Oil & Gas (JKX) operated predominately in the Ukraine - an area where much success has been experienced. Encouragingly, JKX recently developed another successful well in the region. The group's decision to diversify interests into Turkey is also heartening, particularly given the new site's potential reserves.

We remain encouraged by JKX's drilling and exploration programme in Poltava, Ukraine. In the latest drilling update, well M152 in the Molchanovskoye Field tested at a rate of 2,950 barrels of oil per day (bopd) and 2.4 million cubic feet (Mcf) of gas. This follows on the heels of last year's success at well M150.

At the Novo-Nikolaevskoye Field, also in the Poltava region, testing of well N70 is nearly finished. Thus far results have not been encouraging, as only one sub-commercial rate has been encountered. JKX anticipate well N70's testing to be complete in August. In the meantime, the company has already begun studies to provide a greater insight into the field and potential targets. In the Rudenkovskoye Field, the testing programme continues while preliminary work has begun for a new well at the site.

We are excited by the potential offered by JKX's Elizavetovskoye (Eliza) license, also in the Ukraine, as well as the newly announced Karakilise onshore exploration licenses in south-eastern Turkey. Previous seismic studies have estimated gas resources within the Eliza license area to be as high as 50 billion cubic feet (8.3 million boe). The potential to develop reserves in Turkey by an additional 10 to 20 million barrels of oil, would result in a significant reserve upgrade due to JKX's 30 percent interest.

We believe that ongoing exploration and development activities along with strong oil and gas markets will continue to support long-term earnings growth at JKX. Considering the leverage that JKX has to rising energy prices, we believe that the prospective price earnings multiple of 13 times is undemanding.