JKX Oil & Gas (JKX) – Share price slump is hard to justify

JKX Oil & Gas (JKX) – Share price slump is hard to justify

Since I first covered JKX, the company has come out with a positive Q3 update.

Then, whilst I was away on a cruise ship in the Bahamas, I saw JKX’s Q4 results. After reading past the slight decline in production, I viewed these results as good. But the market didn’t appear to agree, with the shares down 16% at one point during the day (latest share price 34.2p, market cap £59 million).

I saw the resulting share price action, laughed and went back to more important things. Was I correct to laugh?

Production – down by 5.7%

JKX’s “production for the fourth quarter of 2018 was 8,874 boepd, which represents a 5.7% decrease compared to the third quarter of 2018”.

Whilst not ideal, does this really warrant millions of pounds being wiped from the market cap? Perhaps, if this is to be the trend going forward. However, the company has stated:

“The reduction in production quarter on quarter in Ukraine is mainly the result of a reduction in workover and drilling activity completed.  As noted below a new drilling contractor has been selected to improve performance in executing the approved development plan”.

Development well – currently adding over 2000 boepd

One well was drilled at the end quarter and “as at the 8th January the well is still producing 11.5 MMcfd (326 Mm3d) of gas and 155 boepd of condensate. The encouraging result from this well has exceeded our expectations with an initial rate four times higher than that tested in IG103 historically”.

My calculation

Using the company’s own conversion numbers, from the RNS:

  • boepd – Barrels of oil equivalent per day (1 boe = 6000 cf)
  • MMcfd – Million cubic feet per day
  • Mm3d – Thousand cubic metres per day (1 m3 = 35.315 cf)

Calculation:

  • 3261000 * 35.315 = 11512690 cf / 6000 = 1918 gas
  • 1918 gas + 155 condensate = 2073 boepd

These additional 2,000 boepd were not in production during Q4 and position JKX strongly for 2019 with approximately 20% more production than 2018’s average of 8,937 boepd.

Balance Sheet – strengthened again

JKX’s balance sheet now shows net cash with the company noting “The Group’s liquidity improved during 2018 and total cash now exceeds the bond liability”.

Taking into account trade and inventory the company had $6.5 million of net cash at the end of September, this increased to $11.3 million by the end of December without the aforementioned 2,000 boepd and with ongoing development work.

Shareholder communications – need to improve!

Had the company clearly spelt out that it was producing a further 2000 boepd, I doubt the share price would have reacted so negatively. I’ve previously spoken to EM Communications (JKX’s PR firm), requesting that shareholder communications be improved – there’s still room for improvement and the website remains horribly out of date.

JKX’s underlying business continues to deliver even if shareholder communications don’t. Given all the positives in last week’s RNS I view the current share price action as bizarre. The company has a development plan in place which includes 3D seismic, appraisal/sidetrack wells and rework to optimise existing wells. Given the development plan and the company’s increasing production I expect JKX to be in a materially different position exiting 2019. I’d be looking to add to my position if JKX wasn’t already circa 5% of my portfolio.

 

At the time of publication, the author holds a long position in JKX.

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    Its been on my watchlist for a while waiting for a good entry point, I think now is a good time for a small investment…thanks Joel

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