PJSC Ukrnafta, Ukraine’s largest oil company, has published operational and financial results for 6 months of 2017.

Highlights:

●     Net revenue and net profit significantly improved, company operating on profitable basis.
●     Daily oil and condensate production growing for the first time in recent years.
●     Current tax obligations covered in full.
●     Investment improved, still below optimal level.
●     Modernization of company underway and accelerating.
●     Production stopped at 6 fields as the licenses were not extended.
●     Significant financial losses to the company and government expected in 3Q2017 due to non-extension of the licenses.

Key developments:

●     On May 18, the general shareholder meeting voted to change the composition of the Supervisory Board and Internal Audit Commission.
●     New set of proposals for financial rehabilitation of Ukrnafta sent to the State Fiscal Service.
●     Proposals for modification of oil auction rules submitted to the government.
●     Priluky drilling unit converted into single drilling organization «Ukrnafta Drilling».
●     In May, the company increased base salaries for engineering and blue-collar employees by 40% and 55% accordingly, while cancelling temporary «crisis» supplemental payment.
●     On May 30 and July 7 the Kyiv District Administrative Court issued rulings obligating the State Geological Service to extend and issue to Ukrnafta 9 licenses.

Mark Rollins, Chairman of the Executive Board of Ukrnafta:

«In the first half of the year the company managed to maintain stable daily production, as well as significantly improve its financial performance. At the same time, as the company had to stop production at 6 fields due to non-extension of its licenses there is a real risk of serious deterioration of operational and financial results in the 3 quarter».

Analysis of operational and financial results

In 1H2017, Ukrnafta stabilized daily oil and condensate production at 4.1 ktonnes through rational use of limited investment resources and a series of technical measures to intensify production at the existing wells. Between January and June daily liquids production improved by 2% from 4 046 to 4 107 tonnes. At the same time, starting from July the daily production declined by 17% to 3.4 ktonnes of oil and condensate as the company was forced to stop operations at six of its fields.

Ukrnafta’s net revenue in 1H2017 improved by 55% on the backdrop of stronger prices for oil and LPG, as well as stable daily production of oil and condensate. The average-weighted oil price was at USD 49.9 per barrel, up by 38% year-on-year.

In 1H2017 Ukrnafta recorded a net profit of UAH 1.3 bln (vs a net loss of UAH 10 mln in 1H2016). This reflects the positive trends in the company’s operating activities, as well as the reduction in the rent rates for oil from 45% to 29% since the beginning of 2017.

In 2017, Ukrnafta has been meeting its tax obligations in full. In 1H2017, the company paid UAH 5.7 bln in taxes, up by UAH 2.1 bln y-o-y. The amount of accrued rent declined insignificantly by 2.5% to UAH 2.8 bln. As of 30 June 2017, the size of the tax debt remained unchanged at UAH 13.2 bln.

Ukrnafta made allocations to reserves for possible fines and penalties related to the rent and other tax arrears accumulated in the previous periods totalling UAH 1.7 bln in 1H2017. This factor continues to affect adversely the company’s financial performance.

The capital investments in 1H2017 reached UAH 318 mln increasing by 43% y-o-y. The company boosted the essential spending on new equipment and maintenance, as well as capital workovers. At the same time, the absence of an agreed solution regarding the repayment of the tax debt limits the company’s ability to invest.

In 1H2017, following the unlawful refusal by the State Geological Service to extend the company’s licenses Ukrnafta was forced to stop production at 6 fields: on 31 March – at Zavodivske field (Lviv region), on 9 June – at Pivdenno-Panasivske and on 27 June – at Anastasiivske, Artyukhivske, Rybalske and Korzhivske fields (all in Sumy region). As of 1 July 2017, Ukrnafta estimates to have missed 4.5 ktonnes of oil and condensate, 3.8 mln m³ of gas and UAH 67 mln of net revenue. The residents of eight communities in Sumy oblast were left without gas supply, while two of Ukrnafta’s gas processing plants have been operating at low capacity: production of LPG was down by 80% at the Gnidyntsy plant and by 30% at the Kachanivske plant.

Given the stoppage of production at 6 fields and likely stoppage at 3 more fields in August and September, the company expects considerable deterioration of its operational and financial results in 2H2017. We estimate that interruption of operations at all 9 fields will lead to 20% decline in production of liquids and 16% decline in production of gas on the annual basis. Ukrnafta will miss UAH 4.1 bln in net revenue, while the state will miss UAH 1.4 bln in rent payments.

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