JKX – Full steam ahead! #JKX
Since covering JKX in late January, the shares are up about 20% after a number of positive developments (latest share price 57p ask, market cap £98 million).
2018 Annual report – a transformed company!
JKX released its annual report on Monday. The company has completely transformed itself which is highlighted in the following numbers:
The numbers speak for themselves: cash generation more than doubled, whilst cash flow used in investing activities reduced – a more efficient use of cash! A $17.7m loss in 2017 turned into a $15.3m profit. This is the first year JKX has been profitable since 2003, and it is now net cash positive.
Key areas of focus for 2019 are:
- “Successful implementation of the five year field development programme” – converting 93.9MMboe reserves into cash generation.
- “Continued focus on financial stability, risk management and cost control” – continue de-leveraging the balance sheet and JKX expect to “gradually improved cash flow through 2019 as the Group strategy and focus on operational excellence starts to yield results”.
- “Resolving outstanding tax issues” – JKX are expecting a ruling on a claim for underpayment of rental fees of $12.4m during H1 – if the Supreme Court rule in JKX’s favour the ring-fenced cash should move straight onto the balance sheet.
- “An initial, strategic review of areas of new opportunity”
Well 5 sidetrack successful – dropped drill pipe not ideal!
On 7th March, JKX updated the market stating that the Well 5 sidetrack had encountered gas with net pay of 21m – great!
Unfortunately, 1119m of drill pipe was dropped into the well and needs to fished out. In the annual report the company states:
“The workover is currently suspended due to problems with the drill pipe in use. Thorough mechanical, chemical and instrumental inspections have successfully cleared 3,000m of the current 2 7/8” drill pipe for further use. The damaged sections of drill pipe will be repaired by a certified specialist service company in Tolyatti, where work has started already”.
Once this work is completed, JKX’s cash flow will increase again.
UNB – continued performance
JKX own 10% of UNB, another Ukrainian oil & gas company, which is fully impaired. UNB is a private company and doesn’t pay any dividends.
I believe that UNB does have value and many shareholders including myself hope that UNB will be reversed into JKX. James (@lawsjd13 on Twitter) keeps an eye on UNB/JKX closely and I’ll quote him:
“UNB Q1 production results just out: “Gas production for Q1 2019 amounted to 166 million m3, which is 50% more than in Q1 2018 and 74% more than in the same period of 2017.”
“Oil production increased by 49% compared to Q1 of 2018 and by 102% compared to Q1 of 2017”.
“Production growth was achieved thanks to significant investments in exploratory drilling in 2018. Wells that were completed last year opened a range of new deposits, and their potential turned out to be a bit better than we had expected.”
Convertible bonds – less than one year till maturity
JKX has about $5 million of convertible bonds due in February 2020. They bonds can be converted into JKX shares at an effective share price of 76.29 pence. JKX has the option to pay bondholders early and “can redeem the Bonds at any time in full but not in part at their principal amount plus one semi-annual coupon plus any accrued interest. If the Bonds are called prior to 19 February 2020, the redemption price will also include an additional U.S. $6,000 per Bond”.
Given that JKX has net cash, if it continues to deliver – driving the share price – and generates cash, then calling in the bonds early would minimise dilution risk.
I expect JKX’s Q1 results to further improve upon earlier quarters with the company stating that – “production from the first 2 months of 2019 is 11% higher than for the same period in 2018 and 9% higher than the average monthly production during 2018”. JKX’s website continues to be out of date and I hope the BoD will continue improving investor relations and communications.
As a shareholder in JKX I continue to be impressed with the company’s turnaround and look forward to continued growth in production, cash generation and an ever improving balance sheet.
At the time of publication the author holds a long position in JKX