On August 13, 2015 Cub Energy [KUB CN], a Canadian oil&gas exploration and production company with assets in Ukraine, announced its financial results for 2Q2015 and 1H2015. The company reported sales of USD 2.6 mn (-22% y/y) and pro-rata revenue (including 30% share in Kub-Gas LLC) of USD 12.4 mn (-36% y/y) in 1H2015 as a result of a decrease in production volumes (-19% y/y) and lower realized price (USD 7.5 per Mcf) due to lingering effects of the government legislation attempting to reserve a large share of the natural gas market for the state-owned Naftogaz of Ukraine.
Cub Energy reported a netback of USD 1.94 per Mcf in 1H2015 compared to USD 5.98 per Mcf in 1H2014, which was mainly caused by lower gas prices and higher royalties. The company recorded USD 1.9 mn of losses for six months of 2015.
Cub Energy’s operational cash flow was negative at USD -0.6 mn in 1H2015 (1H2014: USD 2.4 mn), while the company’s capital expenditures amounted to just USD 0.1 mn. Cub Energy had USD 1.2 mn of cash & cash equivalents as of June 30, 2015.
During the six months ended June 30, 2015, the company received USD 1.3 mn in dividends from Kub-Gas, compared to USD 4.1 mn in 1H2015. The NBU’s temporary resolution prohibiting the payment of cross‐border dividends is in effect until September 3, 2014, which has been extended by the NBU several times already. The company reported that it continues to review alternatives for repatriating dividends.
The news is NEGATIVE for the company. We downgrade our production estimates to 2,960 MMcf in 2015 (net to Cub Energy) or 1,351 boepd, 30% less than in 2014. It should also be noted that the company is experiencing a liquidity squeeze, with restricted dividend payments and inability to draw down additional funds from the credit facility with Pelicourt. However, we expect the situation to improve in 4Q2015, with the NBU hinting at relaxing some of the FX restrictions and the Parliament likely to vote for the new taxation scheme for natural gas producers (royalty rates of 29% for old gas wells and 20% for new wells, with an additional tax surcharge of 30% payable on free cash flow of new investment projects).
We downgrade our target price for Cub Energy to USD 0.026 per share (CAD 0.034), or an upside of 68% to the current price of USD 0.015 (CAD 0.02).
Although the information in this report has been obtained from sources which Empire State Capital Partners believes to be reliable and was collected in good faith, we do not represent or warrant its accuracy, except with respect to information concerning Empire State Capital Partners, its subsidiaries and affiliates, either expressly or implied, and such information may be incomplete or condensed. Nor has the information and/or data been independently verified, and so is provided without further caveat regarding its reliability, suitability for commerce or specific purpose.
This report does not constitute a prospectus and is not intended to provide the sole basis for an evaluation of the securities discussed herein. All estimates and opinions included in this report constitute our judgment as of the date of the report and may be subject to change without notice. Empire State Capital Partners or its affiliates may, from time to time, have a position or make a market in the securities mentioned in this report, or in derivative instruments based thereon, may solicit, perform or have performed investment banking, or other services (including acting as advisor, manager) for any company referred to in this report and may, to the extent permitted by law, have used the information herein contained, or the research or analysis upon which it is based, before its publication. Empire State Capital Partners will not be responsible for the consequences of reliance upon any opinion or statement contained herein or for any omission. This report is confidential and is being submitted to select recipients only. It may not be reproduced (in whole or in part) without the prior written permission of Empire State Capital Partners.
Any recommendations, opinions, forecasts, estimates or views herein constitute a judgment as at the date of this report. This document has been produced independently of Empire State Capital Partners and the recommendations, forecasts, opinions, estimates, expectations, and views contained herein are entirely those of the research analyst(s). While all reasonable care has been taken to ensure that the facts presented herein are accurate and that the respective recommendations, forecasts, opinions, estimates, expectations, and views are fair and well considered, none of the research analyst(s), Empire State Capital Partners or any of its directors, managers or employees has verified the contents of this document and, accordingly, no research analyst, Empire State Capital Partners or any of its respective directors, managers or employees shall be in any way responsible for its contents.