Friday, May 27, 2016

Cub Energy reports earnings


Revenue from hydrocarbon sales for the three months ended March 31, 2016 was $1.5 million (2015 - $1.8 million).

Revenue from hydrocarbon sales by KUB-Gas for the three months ended March 31, 2016 were $12.7 million (2015 - $17.0 million) of which the Company’s 35% share was $4.4 million (2015 – $5.1 million).

 The total pro-rata revenue from hydrocarbon sales, a non-IFRS measure combining the Company’s revenue and 35% of the allocated KUB-Gas revenue, totaled $5.9 million (2015 - $6.9 million) for the three months ended March 31, 2016.

 The Company’s net income from its 35% equity investment in KUB-Gas for the quarter ended March 31, 2016 was $1.7 million (2015 – $0.1 million) which improved as a result of the reduced natural gas royalty rate. 

 The net income for the Company for the three months ended March 31, 2016 was $1.5 million or $0.00 per share (2015 – $1.2 million net loss or $0.00 per share).

There were $0.1 million in capital expenditures for the quarter ended March 31, 2016 (2015 - $0.1 million) and the pro-rata capital expenditures, a non-IFRS measure combining the Company’s capital expenditures and 35% of the allocated KUB-Gas capital expenditures, totaled $0.3 million (2015 - $0.5 million) for the quarter ended March 31, 2016.

 During the three months ended March 31, 2016, the Company’s Ukraine subsidiary, Tysagaz, entered into an unsecured, non-interest bearing loan agreement with KUB-Gas, whereby KUB-Gas agreed to lend Tysagaz approximately $1.2 million for general working capital. The loan is due and payable on December 31, 2017. The Company expects to repay the loan if, and when, the National Bank of Ukraine lifts the dividend restriction in Ukraine and contemporaneously receive the same amount as a dividend from KUB Holdings. There is no guarantee that the dividend restriction will be lifted or that dividends will be available from KUB Holdings.

 With the current cash resources, no further funding in 2016 under the existing line of credit, temporary suspension of the RK Field, dividend restrictions, currency fluctuations, reliance on a limited number of customers, and impact on carrying values, the Company may not have sufficient cash to continue the exploration and development activities. These matters raise significant doubt about the ability of the Company to continue as a going concern and meet its obligations as they become due.

On the surface the results are encouraging. The one negative is that the dividends from the KUB-Gas partnership are not allowed to be repatriated due to currency restrictions by the National Bank of Ukraine. I was a little concerned about this but the company is getting an interest free loan from KUB-Gas which it will pay back when the NBU lifts the dividend repatriation ban. That should happen sooner than later as brokerage firm Concord is reporting that the NBU is going to allow transfers for the years 2014-2015. 

The National Bank of Ukraine (NBU) is going to satisfy all the demands of international investors for the repatriation of their dividends for 2014-2015 from Ukrainian companies this year, NBU Head Valeria Gontareva told journalists on May 26. “We do not see large amounts, as the years were not very profitable,” she said, as cited by Interfax-Ukraine.

 Recall, a ban on purchases of hard currency for dividend repatriation abroad was introduced in late 2014 during a currency shock. A month ago, the NBU requested Ukrainian banks to collect by May 20 information from their clients on their intention to pay dividends abroad. After analyzing this information, the NBU will prepare a schedule of dividend transfer abroad.

Alexander Paraschiy: We learned from the NBU earlier that it estimated possible demand for dividend repatriation at USD 0.5-0.6 bln. From Gontareva’s statement, we conclude that real demand is below its expectations, possibly within the range of our estimate of USD 0.4-0.5 bln. This does not look like a painful amount for the Ukrainian ForEx market – e.g. it’s less than the amount of dollars that the NBU purchased on the market over the last 30 days (USD 0.53 bln). We expect repatriation of the dividends for 2014-2015 may start as soon as June 2016. The key question now is when the NBU will remove restrictions on dividend repatriation for future periods.

All in all I am getting more and more optimistic about Cub in 2016. The Ukrainian authorities are being forced,due to their need for outside financial help, to make changes that are in the best interest of companies like Cub. This is still a risky speculation but money is definitely flowing into the stock. My view is that we will see continued albeit slow market reforms in Ukraine. The policy of increasing domestic gas production is in our favor. The currency is recovering and the forecast is for the economy to slowly get better. I think Cub has survived the worst and these improvements at the margin could be sufficient to cause a revaluation of the stock. 

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