Ukraine Markets Daily (October 20, 2015)

Market news

  • S&P upgrades Ukraine’s foreign currency sovereign credit ratings to B-/B 
  • Industrial production grew by 5.9% m/m in September 2015
  • Cub Energy’s production down 5% q/q to 1,350 boepd in 3Q2015
  • Serinus’ production up by 2% q/q to 4,078 boepd  

Market comment

The UX Index was up by 0.6% in UAH terms on Monday, and down by 1.0% in the US dollar. The PFTS index was down by 1.2% in UAH terms. Four out of ten companies in the UX index were up in UAH terms, with the largest increase recorded for Azovsteel (1.9%), Alchevsk MP (1.7%) and Bank Aval (1.7%).


On the interbank exchange market, the USD/UAH was up by 1.5% to 21.60 (mid price) on Monday, according to Bloomberg. The official exchange rate reported by the NBU was UAH 21.62.

Ukraine 5-year CDS were unchanged on Monday.


S&P upgrades Ukraine’s foreign currency sovereign credit ratings to B-/B

On October 19, 2015, Standard & Poor's Ratings Services raised its long- and short-term foreign currency sovereign credit ratings on Ukraine to 'B-/B' from 'SD/D' (selective default) on completion of the country’s distressed debt exchange on October 14, 2015. The long- and short-term local currency sovereign credit ratings were raised to 'B-/B' from 'CCC+/C'. As a result, the rating agency expects to assign an issue rating of 'B-' to the newly issued bonds from the country’s debt exchange, assuming Ukraine's long-term foreign currency sovereign credit rating remains at 'B-' and all other things being equal.  The raising of the ratings to 'B-' reflects the government's gradual implementation of reforms that support fiscal, financial, and economic stability, alongside improvement in some of Ukraine's external indicators, including its increasing international reserves. 

The rating on the Eurobonds not included in the exchange is kept at ‘D’, while the rating action assumes one of two treatments for the USD 3 bn ‘Russian’ Eurobond obligation: either the Ukrainian government will pay the obligation out of its international reserves, because governments occasionally pay in full creditors who have not participated in an exchange offer to place the episode behind them; or The Ukrainian government will not pay the obligation, and will let it remain in default until another solution is found or the debt is repudiated. If the second treatment occurs the IMF may enact its "lending into arrears" policy and continue to disburse under its USD 17.5 bn four-year exceptional access Extended Arrangement program, according to S&P. 

The outlooks on the long-term foreign and local currency ratings are stable, assuming that over the next 12 months the Ukrainian government will maintain access to its official creditor support by pursuing needed reforms set out in the International Monetary Fund (IMF) program, therefore diminishing the risk of another default in the next two to three years 

In the meantime, lack of data as to the exact amount for Ukraine's untendered debt, together with uncertain second-half 2015 performance sent the agency assuming Ukraine’s gross general government debt to GDP ratio to remain just over 70% tentatively at year-end 2015. S&P forecast the country’s economy to shrink by about 15% in 2015, due to low confidence and damaged financial stability. In the meantime, an improvement in security conditions is seen to boost economic recovery in 2016, leading to some upside potential to the agency’s 2% GDP growth projection. Conditions in the financial sector remain precarious, according to S&P, allowing to classify Ukraine's banking sector in group '10' (the highest risk) under the agency’s Banking Industry Country Risk Assessment (BICRA) methodology. 

The next scheduled rating publication on the sovereign rating on Ukraine is December 11, 2015, according to the statement.

Our view: 

The news is definitely POSITIVE for Ukraine, reflecting the successes of the government not only in negotiating a restructuring of the country’s foreign debt, but in implementing the needed reforms under the IMF extended financial assistance program. We expect the positive political and security development in the country, including in the embattled eastern regions, the continuation of the country’s cooperation with the IMF and other International Financial Institutions, together with the institutional, regulatory, and policy changes ahead of the forthcoming implementation of the Free Trade Agreement with the European Union from January 1, 2016, to generate robust support to the country’s rating right from early 2016.


Industrial production grew by 5.9% m/m in September 2015

Industrial production increased by 5.9% m/m in September, 2015, according to the State Statistics Service of Ukraine. Manufacturing increased by 10.7% m/m, mining by 0.6% m/m, energy generation and distribution contracted by 4.2% m/m.

Year-over-year, industrial contraction slowed down to 5.1% in September, compared with a decline of 5.8% in August, 13.4% in July, and 18.1% in June 2015. Mining grew by 3.2% y/y, whereas manufacturing contracted by 8.3% y/y, and energy generation fell by 5.4% y/y.

Industrial downfall decelerated to 16.6% y/y in January-September 2015, slowing from an 18% y/y decline in 8M2015.  Drop in the mining industry shrank to 18.7% y/y, to 16.3% y/y in manufacturing, to 13.7% y/y in electricity, gas and steam generation and distribution.

Industrial production in the Donetsk region increased by 16.9% y/y in September, rebounding from a contraction of 4% in August, 36% in July, 46.6% in June. In the Luhansk region industrial production grew by 13% y/y, rising by 41% y/y in August, and falling by 59% y/y and 78% y/y respectively in July and in June. Apart from the Luhansk and Donetsk regions, industrial growth has been recorded in Lviv (3.3% y/y), Kherson (6.8% y/y), and Chernivtsi regions (7.4% y/y). 

Our view: 

The effect of low comparative base of the corresponding period of the previous year, together with some revival of economic activities in the Donbas territories under control of the Ukrainian authorities allowed boosting industrial production in September. We expect industrial production to continue consolidating in the 4Q2015 with regard to the positive political and financial development in the country.


Cub Energy’s production down 5% q/q to 1,350 boepd in 3Q2015

Yesterday Cub Energy [KUB CN], the Ukrainian oil&gas exploration and production company with assets in Eastern and Western Ukraine, announced its operational results for 3Q2015. The company’s average production was down by 5% q/q to 1,350 boepd (Cub’s working interest) in 3Q2015 and down by 38% y/y, mostly due to seasonal demand weakness and lack of reinvestment over the last 15 months. The realized price of natural gas amounted to USD 6.58 per Mcf in 3Q2015 compared to USD 7.08/Mcf in 2Q2015. 

The company reported that the R30c zone in the O-11 well has been successfully fracture stimulated and the most recent test rates are approximately 1.0 MMcfd (KUB’s WI: 0.3 MMcfd). Operations on the M-22 and O-15 wells are continuing, and results will be reported once available. On the newly acquired West Olgovskoye licence, KUB-Gas (in which the company holds a 30% WI) completed the field work and preliminary processing of a 26 kilometer 2D seismic survey.

Cub Energy reported that it is re-evaluating its future capital programs on its 100% owned and operated Tysagaz assets in light of the proposed reduction of royalty rates (from 55% to 29% for gas wells with depths of 5km and less) which are subject to parliamentary approval. At present, the company is considering several workovers in late 2015 or early 2016.

Our view:

The news is moderately NEGATIVE for the company. While decreasing production levels were expected due to a halt of new drilling and exploration, Cub Energy now seems to sell its gas at a significant discount to the maximum price set out by the government (UAH 6,600 per mcm or USD 8.73 per Mcf), which is affecting the company’s profitability. Despite that, the expected royalty rate decrease should improve netbacks and allow the company to reinvest more to support production.

We slightly decrease our target price to USD 0.024 (CAD 0.031) per share, which implies an 11% downside to the current market price of USD 0.027 (CAD 0.035) per share.


Serinus’ production up by 2% q/q to 4,078 boepd

Yesterday Serinus [SEN PW], an international oil&gas exploration and production company with assets in Tunisia, Romania and Ukraine, announced its operational results for 3Q2015. The company’s average production was up by 2% q/q to 4,078 boepd (SEN’s working interest) in 3Q2015, primarily due to the restoration of production at the Sabria Field after being shut in due to protests in May-July 2015. 

Serinus’ working interest production from Tunisia for 3Q2015 was 1,343 boepd, 11% higher than the 1,206 boe/d in 2Q2015. Oil averaged 1,053 bbl/d, and gas was 1.7 MMcfd. Estimated realized prices in Tunisia during the quarter were USD 51.31/bbl and USD 7.93/Mcf. In Ukraine, gas and condensate production during the third quarter were approximately 16.1 MMcfd and 53 bbl/d respectively (both volumes are SEN’s 70% WI). These volumes are marginally lower than 2Q2015 due to normal seasonal demand weakness. The estimated prices received in Ukraine during the quarter were USD 6.58/Mcf and USD 43.01/bbl for natural gas and liquids respectively.

Serinus reported that the R30c zone in the O-11 well in Ukraine has been successfully fracked and the most recent test rates were approximately 1 MMcfd. The company anticipates USD 17 mn of total capital expenditures for 2015 (SEN WI), unchanged from the guidance given in prior press releases. KUB-Gas (in which the company has a 70% WI) has recently acquired 26 kilometres of new 2D seismic over the West Olgovskoye Licence, and processing is underway. 

Our view:

The news is moderately POSITIVE for the company. Despite falling production and lower realized prices in Ukraine, Serinus reported an increase in average production rates due to the start-up of the Sabria field in Tunisia. Furthermore, the company has an impressive inventory of leads for drilling in Satu Mare, Romania, as well as firm drilling locations in Eastern Ukraine. And finally, the expected royalty rate decrease in Ukraine should improve netbacks starting from 2016.



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