Ukraine’s private gas producers revise 2014 plans after tax hikes

Обзоры по компаниям и отраслям 05.08.2014 Ukraine’s publicly traded natural gas production companies all released statements on Aug. 1–Aug. 4 informing investors on the effect of interim hikes in the production-based tax for oil and natural gas for August-December 2014. Serinus Energy (SEN PW), whose Ukrainian asset generated 81% of its total hydrocarbon output in 2013, estimated the tax hike will decrease the netback of its Ukrainian assets by 45% to about USD 111/tcm of gas. The company promised to re-evaluate its capital program in light of the reduced cash flow available. At the same time, the company’s COO Jock Graham admitted that the increase in taxation was a necessary move by the government. He reported material improvement of the security situation in the vicinity of the fields belonging to KUB-Gaz (Serinus’s Ukrainian subsidiary), located in the Luhansk region. Due to the lower risks to its assets, the company is planning to restart its drilling operations, he said. JKX Oil & Gas (JKX LN), whose Ukrainian assets are responsible for 50% of its total hydrocarbons output, reported it’s revaluating the impact of the tax hike on its investment program. It reported it “will be taking operational and financial measures” to protect the interests of shareholders. Regal Petroleum (RPT LN), fully operating in Ukraine, reported that it has yet to estimate the impact of the tax hike, while admitting that the impact of the regulation on the current financial year will be negative. Moreover, it will delay the company’s “ability to commit to future capital investments in Ukraine”. Cadogan Petroleum (CAD LN) reported that the interim tax hikes will not have a material effect on the firm's financial position, operations or work. Alexander Paraschiy: The adopted legislation will indeed reduce the netback of Ukraine-based gas producers by about 2x yoy in 2H14 (for all companies except Regal), while the total effect on their value will be minimal, we believe. The legislation stipulates the tax rate will decrease in 2015 to slightly more than it was in 2013. Moreover, the gas producers that will extract more than 30% of gas from new wells will have lower tax burden next year, compared to 2013, according to our estimates based on the legislation. That’s because the new wells will be taxed 1.8x less for the first two years of their operation. We advise reading our note with more details on new taxation for gas producers that will be released later today.