OREANDA-NEWS. JKX, an upstream oil and gas exploration and production company with significant assets in Ukraine and southern Russia, provides a further operational update to investors following the change in management that took place on 28 January this year and the previous update issued on 29 February.

Production

For the period from January to May 2016, the Company produced 10,322 boepd, an increase of 21.3% on the same period in 2015. Gas production in Russia was higher by 41% due to Well 27 coming on line in late 2015 and undergoing several successful acid tests in the first five months of this year. Despite the cancellation of any development expenditure since early 2015, gas production in Ukraine was stable year-on-year and oil production increased by 12%.  Both results are due to the implementation of an enhancement program targeting the technical potential of existing well stock. As stated in our 2015 annual report, the Company continues to systematically calculate technical potential of existing well stock and identify specific intervention targets that will enhance production for the remainder of 2016.

Revenue

Preliminary unaudited results show YTD revenues at the end of May down 19% on the same period for the previous year. Weakening of local currencies (especially in Russia) and the decline in oil and gas prices, in line with international market trends, resulted in these lower USD revenues despite the production gains.

Ukrainian Dividends

On 7 June 2016 the National Bank of Ukraine ("NBU") issued Resolution 342 which eased the restrictions on payments of dividends to overseas shareholders and which enables the repatriation of dividends for the years 2014 and 2015. The Company is in the process of restarting repatriation of dividends for these periods and expects further easing of dividend restrictions in future NBU announcements. 

Ukrainian Legal Cases

As disclosed in our update on 29 February, the Company's Ukrainian subsidiary, Poltava Petroleum Company ("PPC") has several near-term contingent liabilities arising from three separate court proceedings over the amount of rental fees paid in Ukraine for certain periods since 2007, which in total amount to a potential liability of approximately $41 million, including interest and penalties.

For claims relating to 2007 and amounting to $6 million, the Supreme Court of Ukraine ruled in favour of the Company and this case can now be considered closed. For claims relating to 2010, amounting to $11 million, PPC lost an appeal to the High Administrative Court of Ukraine and is in the process of filing an appeal to the Supreme Court. In the case of 2015 claims, which represent the remaining $24 million of liability, PPC is in the process of court hearings, although the Company considers such claims to be in violation of the interim award received from the arbitration tribunal on 31 May as noted above.

As disclosed last week, the Ukrainian police visited the office of PPC and the homes of two of our employees on 14 June. The searches undertaken were the result of an investigation of claims of alleged underpayment of taxes which have been made against PPC by a local prosecutor. As stated in our earlier release, we cooperated fully with the searches but vigorously contest the validity of the claims. Although there is no direct evidence to date connecting these searches to the pursuit of our legal rights, we believe this police action to be in violation of the treaty arbitration protections, and the Company is considering further legal action in this respect.

Overheads and operating costs

The Group continues to identify cost reduction possibilities throughout the group and measures have been taken since January 2016 to significantly reduce the cost burden of the Company's London headquarters. Head office headcount has been reduced by 45% and we are in the process of moving remaining staff on to one floor of the building where we previously occupied four floors. Negotiations with the landlord to extract the Company from the long-term lease agreements are ongoing. 

Convertible debt

As set out in the previous operational update, the scheduled repayment to bondholders due in February 2016 of $12.3 million was made on time and in full from cash balances on hand. As part of a wider project to mitigate this liability, bonds with a face value of $2.2 million were repurchased by the Company on 7 June 2016 and subsequently cancelled. In addition to being able to acquire these bonds at a discount, the Company has also been able to avoid associated interest and redemption costs amounting to $0.4 million that would have been incurred over the next 8 months.

As a result of this transaction, the liability facing the Company in February 2017 has fallen from $30.1 million to $27.6 million. The Company continues to pursue strategies that will mitigate this liability.