JKX Fights to Stay Afloat

UK upstream minnow JKX told shareholders of a cashflow crisis that would limit its activities to only the most risk-averse activities, as it reported its 2017 financial results March 29. There are relatively serious disagreements with the Ukrainian government over tax and other payments that have forced the board to consider the viability of the company, despite appeals to courts in the UK and the Netherlands that supported JKX, and despite a year on year reduction in its net losses.

The previous CEO Tom Reed had staked a lot on the company's promising Rudenkivskoe field, which he planned to hydraulically fracture to release billions of cubic metres a year, using state of the art technology from the US. His aim was to help Ukraine become a gas exporter.

But the results failed to match expectations while also "significantly depleting cash balances," JKX said. On June 30, 2017 the unrestricted cash of the group was at $4mn, compared with $14.1mn at the end of the year before. "This abrupt decrease was mainly due to $10.4mn spent on capital expenditures in the first half of 2017 ($2.5mn in the first half of 2016) and payments to bondholders in February 2017, it said. Reed was dismissed at the end of June.

From now on "to make the best use of available resources, JKX will therefore concentrate on proven low risk technologies to achieve incremental production increases from each well while keeping the investment for each project at a minimum," it said. Its focus on Russia and Ukraine mean it will leave Hungary. It is also leaving Slovakia where local protestors, apparently with government connivance, harried the operations led by Alpine to the extent that the other partners are also considering their future there. 

In Ukraine, it expects to "stabilise and then to increase production and take advantage of the favourable market conditions. We will increase the use of leased wells and stimulate the production from our own wells through the implementation of the revised workover program." Similarly cautious measures are proposed for Russia, with the hoped-for goal of better cashflow through the second half of 2018.

There is also a forensic investigation into the disappearance of $1mn, on legal services of an indeterminate nature, as a result of a "breakdown in controls" in Ukraine. JKX has appointed auditors KPMG to find out where the money went last year, and why.

Wholly-owned subsidiary Poltava Petroleum had problems with the tax officials last year and was raided by the police several times. There are also substantial claims and counterclaims with the government over other fees and payments due, some of which JKX has won in whole or in part. JKX said that the company "will continue to defend its position in local courts. Given the materiality of these tax liabilities we have considered the risk to the group's ability to continue as a going concern," it said. The company made a net loss of $17.7mn last year, less than half the $37.1mn it lost in 2016.