PJSC Ukrnafta, Ukraine’s largest oil company, has published operational and financial results for 6 months of 2018.

Highlights

• Net revenue and net profit significantly improved;
• Daily hydrocarbons production stable since beginning of the year;
• Current tax obligations covered in full, company repaying outstanding tax debt;
• Investments improved, but still below optimal level;
• Modernization of organizational structure and business processes underway;
• Company switched from ammonia production to selling natural gas in Ukrainian market since April;
• Half of state-run oil auctions failed in 1H2018 impairing company’s ability to freely sell its crude;
• Rebranding of retail network underway.

Key developments

• On June 14, the general shareholder meeting voted to reinstate the current members of the Supervisory Board;
• On March 30, the Supervisory Board voted to support the management’s proposal to consolidate all oilfield services into a single organization;
• In early April 2018, Kyiv administrative court of appeals sustained the lower court’s decision obligating the State Geological Service to extend Ukrnafta’s 11 licenses expiring in 2018.

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 improve its financial performance. Ukrnafta continues to pay all taxes in full and has already paid a portion of the overdue tax debt. At the same time, the management along with the shareholders is looking for a solution to allow Ukrnafta to repay its tax debt completely, which will enable the company to increase investments significantly and transition from stabilization of production to growth».

Analysis of financial results

Ukrnafta has continued to improve financial performance in the second quarter and first half of 2018. In the reported period the average-weighted oil price was at USD 67.13 $ per barrel, up by 34.4% year-on-year. Thus, with favourable price environment and stable production, Ukrnafta’s net revenue increased by 22% year-on-year to UAH 16.8 bln in 1H2018. At the same time, net profit increased by 54% to UAH 2 bln year-on-year.

Ukrnafta continues to meet its current tax obligations in full and repay the tax debt at the same time. In the first half of the year, the company paid UAH 7.4 bln in taxes, including UAH 690 mln of the overdue tax debt. At the same time, the company continues to make allocations to reserves for possible fines and penalties related to the rent and other tax arrears accumulated in the previous periods, which totalled UAH 1.7 bln in 1H2018.

Ukrnafta increased capital investments by 26% year-on-year to UAH 402 mln. The company boosted the essential spending on new equipment and maintenance, as well as capital workovers.

Analysis of operational results

In 1H2018, Ukrnafta stabilized daily hydrocarbons production at 3.9 ktonnes of liquids and 2.9 mln m3 of gas. The company was able to achieve stabilization using only the existing wells and against the natural depletion of fields due to rational use of limited financial resources and measures to intensify production.

The average daily rates improved by 12.6% for liquids and by 7.4% for gas in 1H2018 vs 1H2017. The company continues to restore gradually production rates that declined last year after Ukrnafta had to halt operations at 6 fields following unlawful blocking of production licenses by the regulator.

At the same time, the company has not yet achieved full recovery of production to last year’s level, hence production of hydrocarbons and LPG in 1H2018 declined year-on-year.

Ukrnafta managed to halt production decline due to natural depletion of its fields and years of underinvestment. However, in order to transition from stabilization to growth the company needs to increase investments in infrastructure upgrades, intensification of production, new drilling and obtain new licenses. Ukrnafta has the need and the resources to increase investments significantly, however, its ability to invest continues to be limited by lack of a solution agreed by the government to repay its overdue tax debt.

Besides, in 1H2018 six out of twelve state-run oil auctions failed as no buyers showed interest to participate. Deficiencies in the auction system impair the ability of Ukrnafta to sell its crude freely, which has a negative impact on the cash flow and investments.

In the reported period, Ukrnafta took a number of steps to increase productivity at the existing wells. The company replaced sucker rod pumps with modern ESPs at 9 wells, resulting in additional 1,108 tonnes of oil and condensate in 1H2018. As of the end of June, the company operated a fleet of 285 ESPs. The company deployed modernized gas-lift equipment at several wells of Mykulychyn field leading to production increase. Ukrnafta performed 4 fracking operations in Western Ukraine, which are expected to produce additional 3.4 ktonnes of liquids and 1.3 mln m3 of gas in 2H 2018.

Since the beginning of the year, Ukrnafta completed 58 capital workovers and 54 stimulation jobs. As of June 30, due to the workovers Ukrnafta produced additional 8.7 ktonnes of oil and condensate and 16.3 mln m3 of gas. The stimulations resulted in incremental production of 6.1 ktonnes of liquids and 1.3 mln m3 of gas. The company also performed 16 coil-tubing jobs.

In 1H2018, Ukrnafta’s 13 production licenses expired and were not extended on time by the State Geological Service. The company believes the regulator had to extend all its licenses in accordance with the legislation. Ukrnafta proved its position at the administrative court and its decision has come into force. Currently the company continues production operations in all fields and pays the rent and other taxes at full extent.

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