Ukrnafta reports unaudited financial results for 12 months 2016
Ukrnafta reports unaudited financial results for 12 months 2016

PJSC Ukrnafta, Ukraine’s largest oil company, has published unaudited financial results for 12 months 2016. The company is undergoing an independent external audit and will publish the audited financial statements in 2 quarter 2017.

 

Items

12m2016

12m2015

Production of crude oil and condensate, ktonnes

1 518

1 671

Gas production,  mln m3

1 301

1 503

Production of LPG, ktonnes

134

154

Motor fuel sales, ktonnes

541

594

Net revenue, mln UAH

22 579

28 762

Profit / (loss) from operating activities, mln UAH

(14 698)

(3 514)

Financialresultsfromoperatingactivitiesbeforetaxandnet of amortization expenses (adjusted EBITDA), mln UAH

2962

6 077

Profit / (loss) before taxation, mln UAH

(11 905)

(6 148)

Income tax, mln UAH

165

708

Net profit / (loss), mln UAH

(8 739)

(5 441)

 

Mark Rollins, Chairman of the Executive Board of Ukrnafta:

“Ukrnafta managed to stabilize production at the level above the natural rate of decline despite challenging price environment and limited investments. The financial result in 2016 reflects losses that arose from actions and decisions taken prior to the arrival of the new management. Nonetheless, the company’s operations remain fundamentally healthy. The management believes in the potential of the company and sees the opportunities to resolve Ukrnafta’s historic problems. We continue the dialogue and look to the government and shareholders for solutions that will enable the company to develop and restore profitability.”

Production and other factorsimpacting revenue

In 2016, Ukrnafta stabilised daily output of oil and condensate at 4.2 ktonnes per day through rational use of limited investment resources and a series of technical measures to intensify production at the existing wells. At the same time, the output of oil and condensate declined by 9.2% year-on-year, while the output of natural gas declined by 13.4%. The natural exhaustion of wells and lack of investment in maintenance, modernization and drilling account for the decline in production. Nonetheless, Ukrnafta managed to maintain production levels above the natural rate of decline.

Besides, the operational results were negatively impacted by suspension of production at Bytkiv-Babchenske and Lelyakivske fields operated by two joint ventures where Ukrnafta is a party. Subsequently, production at these fields resumed in 1 quarter 2017.

Oil prices were weak in 2016, particularly in the beginning of the year. Even though the price environment improved towards the end of the year, the average-weighted price for oil in 2016 was USD 40 per barrel vs USD 53 per barrel in 2015.

Lower production volume and weak oil price drove down the revenue to UAH 22.6 bln in 2016 from UAH 28.8 bln in 2015.

Analysis of financial results

In 2016, the company recorded operating loss of UAH 14.7 bln, which was materially impacted by a number of non-monetary accounting provisions made in accordance with the IFRS rules, namely:

  • provisions for possible fines and penalties for unpaid rent and other taxes in the previous periods UAH 4.2 bln (UAH 6.3 bln in 2015)
  • allocations to reserves for balance sheet debt and advance payments UAH 11.2 bln (UAH 2 bln in 2015)
  • expenses related to re-evaluation of the company’s assets UAH 0.6bln

Deterioration in the operating results was driven by the increase in non-monetary allocations to reserves for the balance sheet debt and advance payments, which includes overdue receivables for the oil shipments made in 2015.

Once adjusted for these major non-monetary items, the financial result from operating activities before tax and net of amortization expenses (adjusted EBITDA) was UAH 3.0 bln.

The loss before taxation was UAH 11.9 bln. Adjusted for non-monetary items (amortization of financial instruments +UAH 2.8 bln, deferred income tax + UAH 4 bln andtax liability for income tax -UAH 800 mln) the net loss was UAH 8.7 bln.

Rent and tax debt

In 2016, the nominal rent rate for oil and condensate was 45% for wells under 5,000 meters and 21% for deeper wells. Taking into account the peculiarities of the taxation mechanism, the base price for assessment of rent exceeded the actual sale price of oil and condensate. As a result, in 2016 the company faced an effective rent rate of 47%.

Despite the restricted cash flow, in 2016 Ukrnafta paid UAH 8.1 bln in taxes, an improvement over 2015 when the company paid UAH 5.3 bln. The company spent 45% of its total cash expenses to cover tax liabilities, while 26% was spent on essential operational expenditures and investments, 16% on labor expenditures, and 12% on procurement of petroleum products for Ukrnafta’s retail network in the first 4 months of 2016 prior to change in the company’s business model in the retail sector.

However, the company was unable to cover all tax expenses due to the need to finance critical operational expenditures, difficulties in payments by some of its business partners and accumulation of product inventory. As a result, the tax debt increased by UAH 3.2 blntoUAH 13.3 bln as of 31 December 2016.

Ukrnafta recognizes that the amount of the accumulated tax debt and provisions for possible fines and penalties is unsustainable and constrains the company’s ability to modernize and develop its business. Therefore, in early 2016 the management proposed that a financial restructuring under court supervision be implemented as quickly as possible. Such a mechanism of financial recovery envisages the consent of all creditors for debt restructuring and repayment while allowing the simultaneous modernization and growth of the company. The management continues the dialogue with the key stakeholders to resolve this issue.

Receivables

The amount of receivables for products, goods and services declined by UAH 6.4 bln to UAH 2.8 bln at the end of 2016, as the company was required to make provisions for non-performing debt as per the IFRS rules.

The company took steps to recover overdue receivables, filing in July 2016 six lawsuits for a total of UAH 7.6 bln. In five of these cases, the courts of first instance ruled in favor of Ukrnafta obligating the defenders to repay close to UAH 5 bln. In two of these cases, the court decisions went into force after review in the court of appeals awarding about UAH 2 bln to Ukrnafta. Ukrnafta is taking steps to enforce recovery of the debt.

There was no notable increase in the amount of overdue receivables for oil throughout the year. Any issues encountered with payments by customers have been resolved in the course of the year by negotiations, and all customers are paying on time.

Investments

In 2016, the capital investments was UAH 510 mln, making it one of the smallest investment programs over the past 10 years. The company, therefore, expects the output to decline in 2017. At the same time, given the reduction in the rent rates for oil from 45% to 29% as of 1 January 2017, the company envisaged to increase its investment program to UAH 2.4 bln. The company believes that this investment is critical to maintain basic production systems, safety and asset integrity. However, the implementation of the investment program will depend on the arrangements concerning the repayment of the company’s tax debt.

In order to ensure the relevance of valuation of assets on the company’s balance sheet and identify the areas of investment the company performed re-evaluation of assets as at 31 December 2016. Prior to that Ukrnafta commissioned qualified appraiser DeGolyer and MacNaughton (US) to provide re-evaluation of its hydrocarbon reserves as of 30 June 2016.

 

For more information please contact press office: +38 044 239 14 93