[BUY] Cub Energy: revision of target price (August 14, 2015)

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.

Our view:

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).



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