JKX Oil & Gas
01/30/2006
 JKX Oil & Gas has been a standout performer over the last few years. The group has experienced significant success in the Ukraine, where up until a year ago operations were predominately based. However we are encouraged by the company now diversifying into other regions. More recently interests in Turkey have been added. With oil recently heading back above US$65 a barrel we remain steadfast in the belief that higher energy prices will offer the industry support throughout 2006. In such an environment, JKX's active exploration and development program will be well rewarded in our opinion.
In October JKX announced that it had farmed into two onshore exploration licenses with Aladdin Middle East. The licenses cover 897 square kilometres in the Thrace region of western Turkey. JKX will earn a 25 percent interest by paying 50 percent of the study costs up to a maximum of US$415,000. A seismic survey is scheduled for this year to confirm the presence of a viable prospect, with the first well potentially being drilled in 2007. We are heartened that management remains committed to diversifying reserves and future production. This strategy will de-risk and enhance future earnings in our opinion.
In the meantime robust production at Poltova in the Ukraine should continue to underpin earnings in the year ahead. After recent success at wells M152 and M151, JKX has moved the drilling rig to well R101 in the Rudenkovskoye Field. Two additional sites in Poltava (wells R12 and N70) are also undergoing testing. In October JKX sourced another drilling rig to speed up development of both production and exploration licences. Meanwhile JKX's exploration programme in Italy and Bulgaria is also advancing.
We continue to believe that oil prices will remain stubbornly high for years to come. The tightness of global supply is reinforced by the reaction of oil prices to security concerns in Iran and Nigeria last week. JKX will also benefit from rising gas prices in Ukraine as well. On January 1 Russia suspended gas supplies to the Ukraine, demanding that 'European' prices be paid. To resolve the dispute prices were renegotiated, which has resulted in a general uplift in the cost of gas across the Ukraine. With energy prices rising while production and reserves are increasing, the outlook for earnings growth at JKX is robust. Yet the company's valuation remains far from excessive at around 11 times 2006 earnings.
|